Question

please complete questions S12-10, S12-11,

S12-12

d. Explain your S12-10 Compute NPV-equal net cash inflows (Learning Objective 4) Woodsy Music is considering investing $625,000 in private lesson studios that will have no residual value. The studios are expected to result in annual net cash inflows $90,000 per year for the next nine years. Assuming that Woodsy Music uses an 8% rate, what is the net present value (NPV) of the studio investment? Is this a favorable investment? S12-11 Compute IRR-equal net cash inflows (Learning Objective 4) Refer to Woodsy Music in S12-10. What is the approximate internal rate of return (IRR) of the studio investment? S12-12 Compute NPV-unequal net cash inflows (Learning Objective 4) The local supermarket is considering investing in self-checkout kiosks for its customers. The self-checkout kiosks will cost $45,500 and have no residual value. Management ex- pects the equipment to result in net cash savings over three years as customers grow ac- customed to using the new technology: $14,000 the first year; $21,000 the second year, $27,000 the third year. Assuming a 14% discount rate, what is the NPV of the kiosk invest- ment? Is this a favorable investment? Why or why not?

Answer 1

1. NPV = -Initial Investment + Annual Cash Inflow*( 1/(1+r) + 1/(1+r)^2 + -----)

NPV = -625000 + 90000[1/1.08 + 1/1.08^2 + 1/1.08^3 + 1/1.08^4 + 1/1.08^5 + 1/1.08^6 + 1/1.08^7 + 1/1.08^8 + 1/1.08^9]  

= -62780.09

This is unfavourable investment.

2. let IRR = r

-625000+ 90000( 1/(1+r) + 1/(1+r)^2 + ----- + 1/(1+r)^9) = 0

(1/r)(1-(1+r)^-9) = 625/90 = 6.945

=> r = 5.53%

3. NPV = -Initial Investment + Annual Cash Inflow*( 1/(1+r) + 1/(1+r)^2 + -----)

= -45000 + 14000/(1+0.14) + 21000/(1+0.14)^2 + 27000/(1+0.14)^3

= 1663.75

> It is a favourable investment. NPV>0