Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at 6.2%.
State the decision using both the NPV and IRR methods of evaluating capital budgeting projects and explain your answer.
| Present Value = Future value/ ((1+r)^t) | |||||||||
| where r is the discount rate that is 6.2% and t is the time period in years. | |||||||||
| Net present value (NPV) = initial investment + sum of present values of future cash flows. | |||||||||
| Internal rate of return (IRR) is the rate of return for which NPV is zero. | |||||||||
| Use the financial formulas function in excel to calculate the IRR. | |||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| cash flow | -1250000 | 207000 | 207000 | 207000 | 207000 | 207000 | 207000 | 207000 | 207000 |
| present value | 194915.3 | 183536 | 172821.1 | 162731.7 | 153231.4 | 144285.7 | 135862.2 | 127930.5 | |
| IRR | 6.71% | ||||||||
| NPV | 25313.97 | ||||||||
| Rachel is using a discount rate of 6.2% to fund the investment. | |||||||||
| and the discount rate is less than the IRR (6.71%). Therefore, the project will have a positive NPV. | |||||||||
| In other words, the IRR is greater than the discount rate, so the project will be profitable. | |||||||||
| Furthermore, the project is acceptable because the NPV is $25314 that is greater than zero. | |||||||||
Rachel should go ahead with the investment.
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...