Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
- Expected annual revenues: $720,000
- Projected product life cycle: five years
- Equipment: $740,000 with a salvage value of $100,000 after five years
- Expected increase in working capital: $100,000 (recoverable at the end of five years)
- Annual cash operating expenses: estimated at $432,000
- Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.
| Year | Cash Flow |
| 0 | $ |
| 1–4 | $ |
| 5 | $ |
2. Using the estimated annual cash flows,
calculate the NPV.
$
3. What if revenues were overestimated by $144,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same. Enter cash outflows as negative amounts and cash inflows as positive amounts.
| Year | Cash Flow | Present Value |
| 0 | $ | $ |
| 1–4 | ||
| 5 | ||
| Net present value | $ |
Homework Answers
solution 1:
| Computation of Estimated annual cash flows | |||
| Particulars | Year 0 | Year 1-4 | Year 5 |
| Initital investment | -$740,000.00 | $0.00 | $0.00 |
| Increase in working capital | -$100,000.00 | ||
| Expected annual revenues | $720,000.00 | $720,000.00 | |
| Annual cash operating expenses | -$432,000.00 | -$432,000.00 | |
| Salvage value | $100,000.00 | ||
| Release of working capital | $100,000.00 | ||
| Expected cash flows | -$840,000.00 | $288,000.00 | $488,000.00 |
solution 2:
| Computation of NPV | |||
| Year | Cash Flow | PV factor | Present Value |
| 0 | -$840,000.00 | 1 | -$840,000 |
| 1–4 | $288,000.00 | 3.312 | $953,856 |
| 5 | $488,000.00 | 0.681 | $332,328 |
| Net present value | $446,184 | ||
Solution 3:
| Computation of Actual cash flows | |||
| Particulars | Year 0 | Year 1-4 | Year 5 |
| Initital investment | -$740,000.00 | $0.00 | $0.00 |
| Increase in working capital | -$100,000.00 | ||
| Expected annual revenues | $576,000.00 | $576,000.00 | |
| Annual cash operating expenses | -$432,000.00 | -$432,000.00 | |
| Salvage value | $100,000.00 | ||
| Release of working capital | $100,000.00 | ||
| Expected cash flows | -$840,000.00 | $144,000.00 | $344,000.00 |
| Computation of NPV | |||
| Year | Cash Flow | PV factor | Present Value |
| 0 | -$840,000.00 | 1 | -$840,000 |
| 1–4 | $144,000.00 | 3.312 | $476,928 |
| 5 | $344,000.00 | 0.681 | $234,264 |
| Net present value | -$128,808 | ||
Note: Actual answer may differ due to rounding of PV factors because PV factor table are not provided.
Add Answer to:
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with...
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a...
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product: Expected annual revenues: $720,000 Projected product life cycle: five years Equipment: $800,000 with a salvage value of $100,000 after five years Expected increase in working capital: $110,000 (recoverable at the end of five years) Annual cash operating expenses: estimated at $432,000 Required rate of return: 8 percent The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to...
value 10.00 points Exercise 13-2 Net Present Value Method [LO13-2] The management of Kunkel Company is...
value 10.00 points Exercise 13-2 Net Present Value Method [LO13-2] The management of Kunkel Company is considering the purchase of a $28,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year useful life, it will have zero scrap value. The company's required rate of return is 13% Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table Required: 1. Determine the net present value of...
Provide the missing information for the following projects using the present value of an annuity function...
Provide the missing information for the following projects using the present value of an annuity function [time value of money (TVM) keys rather than the cash flow (CF) function keys]. (Hint: The present value of the annuity of the annual cash flows minus the initial outlay must equal the NPV. For example, for Project A, calculate the present value of five $35,000 cash inflows and subtract the initial outlay (Co) to get the project's NPV.) Inltlal Outlay (CO) Length (In...
Net Present Value Use Exhibit 120.1 and Exhibit 128.2 to locate the present value of an...
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...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amo...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.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 $2,850,000 and will last 10 years. b. Evee...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $80,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $35,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $10,000 Year 2 20,000 Year 3 20,000 Year 4 20,000 Year 5 10,000 Although salvage...
Exercise 7-2 (Algo) Net Present Value Analysis (LO7-2] The management of Kunkel Company is considering the purchase of...
Exercise 7-2 (Algo) Net Present Value Analysis (LO7-2] The management of Kunkel Company is considering the purchase of a $31,000 machine that would reduce operating costs by $8,500 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 13%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $72,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $30,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $9,000 Year 2 18,000 Year 3 18,000 Year 4 18,000 Year 5 9,000 Although salvage...
Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown...
Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown in Exhibit 123.1 and Exhibit 120.2 as you complete the requirement below. Blaylock Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of trenching machines. The outlay required is $806,784. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash...
Net Present Value Method Annuity E &T Excavation Company is planning an investment of $386,700 for a bulldoze...
Net Present Value Method Annuity E &T Excavation Company is planning an investment of $386,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for five years. Customers will be charged $120 per hour for bulldozer work. The bulldozer operator costs $26 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $20,000. The bulldozer uses fuel that is expected to cost $34 per hour of bulldozer operation. Present Value...
value 10.00 points Exercise 13-2 Net Present Value Method [LO13-2] The management of Kunkel Company is considering the purchase of a $28,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year useful life, it will have zero scrap value. The company's required rate of return is 13% Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table Required: 1. Determine the net present value of...
Provide the missing information for the following projects using the present value of an annuity function [time value of money (TVM) keys rather than the cash flow (CF) function keys]. (Hint: The present value of the annuity of the annual cash flows minus the initial outlay must equal the NPV. For example, for Project A, calculate the present value of five $35,000 cash inflows and subtract the initial outlay (Co) to get the project's NPV.) Inltlal Outlay (CO) Length (In...
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...
Net Present Value Use Exhibit 12B.1 and Exhibit 12B.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 $2,850,000 and will last 10 years. b. Evee...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $80,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $35,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $10,000 Year 2 20,000 Year 3 20,000 Year 4 20,000 Year 5 10,000 Although salvage...
Exercise 7-2 (Algo) Net Present Value Analysis (LO7-2] The management of Kunkel Company is considering the purchase of a $31,000 machine that would reduce operating costs by $8,500 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 13%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment...
Net Present Value Analysis Champion Company is considering a contract that would require an expansion of its food processing capabilities. The contract covers five years. To provide the required products, Champion would have to purchase additional equipment for $72,000. Champion estimates the contract will provide annual net cash inflows (before taxes) of $30,000. For tax purposes, the equipment will be depreciated as follows: Year 1 $9,000 Year 2 18,000 Year 3 18,000 Year 4 18,000 Year 5 9,000 Although salvage...
Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown in Exhibit 123.1 and Exhibit 120.2 as you complete the requirement below. Blaylock Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of trenching machines. The outlay required is $806,784. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash...
Net Present Value Method Annuity E &T Excavation Company is planning an investment of $386,700 for a bulldozer. The bulldozer is expected to operate for 2,000 hours per year for five years. Customers will be charged $120 per hour for bulldozer work. The bulldozer operator costs $26 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $20,000. The bulldozer uses fuel that is expected to cost $34 per hour of bulldozer operation. Present Value...
Most questions answered within 3 hours.
-
Use inheritance to create a new class AudioRecording
based on Recording class that:
it will retain...
asked 3 minutes ago -
In the long run, an increase in the quantity of money ________
the value of money...
asked 9 minutes ago -
In February 2008, a team of Canadian scientists revealed rare
new horseshoe crab fossils from 445...
asked 14 minutes ago -
a firm produces output according to the following function q=
f(L,K) = L^1/2K^3/2. The cost of...
asked 13 minutes ago -
Please
NO HANDWRITING
NO COPY & PASTE from the internet
On March 6, 2019, Mark Zuckerberg...
asked 14 minutes ago -
Please make a JAVA program for the following using switch
structures
Write a program that simulates...
asked 17 minutes ago -
in
2011, real gdp in the united states was below potential gdp. This
fact definitely means...
asked 18 minutes ago -
Describe how the file manager allocates a file to a single user.
List the steps that...
asked 42 minutes ago -
For the following reaction:
IBr(g) + 4F2(g) → IF5(g) +
BrF3(g)
Compound
ΔH°f (kJ mol-1)...
asked 44 minutes ago -
Assuming the simple probability of even A is given as P(A) and
the simple probability of...
asked 46 minutes ago -
2.- It is known that 20% of the students on campus are smokers.
If 8 students...
asked 47 minutes ago -
Provide a summary/reflection of what you gleaned of how law
enforcement is effect by Unconventional Weapons...
asked 1 hour ago