Question

Net Present Value Use Exhibit 120.1 and Exhibit 128.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,250,000 and will last 10 years. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $45,000 per year. She estimates that the shop will have a useful life of 6 years. C. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV. Should the company buy the new welding system? Yes ✓ 2. Conceptual Connection: Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV. Should she invest? No What if the estimated return was $135,000 per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar.

Answer 1

NPV: Inetcat investment - Puernt voice of coch inflows Pnition arvestment - $2,250,000 Pucient value of cash entlows - PVAF @12% for 10 year - cost benetes per year = 6.1944 = $480,000 . $480.000 x 641944 = $2,973, 812 NPV Puerent value o con enfoce eent value of cash intloco - chitial investment = ,973,312 - $2,250,000 3 $ 423,312 Yes the shoud bey new ceeding machine @ Aniteoul Envestment - $280.000 Present value of cash Entlows - PVAF@gy. to 6 yeau - 46229 - Intlow per year - $ 45.000 pecsent value: $45.000 x 4:6229 2 $ 208,031 NPW: $ 208,031 - $ 280,000 2 - $71,969 No we shout now invest.

(b) - Intlow pee yeae - $135,000, Pucient value = $1351000 & 4.6289 $ 624,091 NPV - $ 624,091- $280.000 = $ 344,091 Since, NPV the core can accept (3) Gerren, NPV = $ 63,900 Intlow pee yeae - $ 135.000 PYAP @ 107. Hol 8 yeau - 5.3849 Pecsent value of couhentiow $135.000 * 5-3349 2 & 720,212 Nove pucant value of cash intoor initial investment $ 63,900 = $420,212 - inittal investimen initial investment $720,212 $63,900 $ 656,312 : Investment: $656,312