Question

Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,000, has a 5-year life, and has no residual value at the end of the 5 years. The company’s cost of capital is 10.87%. Known with less certainty are the actual after-tax cash inflows for each of the 5 years. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV given each scenario.

Expected cash inflows Year Pessimistic Most likely Optimistic

1 $6,750 $ 9,250 $11,750

2 7,250 10,250 13,250

3 8,750 11,750 15,750

4 7,750 10,750 12,750

5 5,750 7,750 8,750

Answer 1

Cashflows Year Pessimistic Most likely Optimistic [email protected]% Pessimistic А в Тc AxD 0 $ -27,000 $ -27,000 $ -27,000 1.000 $ (27,000.00) $ 1 $ 6,750 $ 9,250 $ 11,750 0.902 $ 6,088.21 $ 2 $ 7,250 $ 10,250 $ 13,250 0.814 $ 5,898.07 $ 3 $ 8,750 $ 11,750 $ 15,750 0.734 $ 6,420.46 $ 4 $ 7,750 $ 10,750 $ 12,750 0.662 $ 5,129.15 $ 5 $ 5,750 $ 7,750 $ 8,750 0.597 $ 3,432.40 $ Present value Most likely BxD (27,000.00) $ 8,343.10 $ 8,338.65 $ 8,621.76 $ 7,114.63 $ 4,626.28 $ Optimistic CxD (27,000.00) 10,598.00 10,779.23 11,556.82 8,438.28 5,223.21 Net present value -$31.71 $10,044.42 $19,595.55

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