At the end of 2019, Uma Corporation is considering a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically, they estimate that a mixed stream of future cash flow savings will occur at the end of the years 2020 through 2025. The years 2026 through 2030 will see consecutive $90,0000 cash flow savings at the end of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2026 through 2030 will be 11%.The project managers will find the project acceptable if it results in present cash flow savings of at least $860,000. The following cash flow savings data are supplied to the finance department for analysis.
a. | Determine the value (at the beginning of 2019) of the future cash flow savings expected to be generated by this project. | |||||||
b. | Based solely on the one criterion set by management, should the firm undertake this specific project? Explain. | |||||||
c. |
What is the “interest rate risk,” and how might it influence the
recommendation made in part b? Explain. |
Discount rate for years 2020 - 2025 | 7% | ||
Discount rate for years 2026 - 2030 | 11% | ||
Cash | Present | ||
Year | Year (n) | Flow | Value |
2020 | 1 | $ 110,000 | |
2021 | 2 | 120,000 | |
2022 | 3 | 130,000 | |
2023 | 4 | 150,000 | |
2024 | 5 | 160,000 | |
2025 | 6 | 150,000 | |
2026 | 7 | 90,000 | |
2027 | 8 | 90,000 | |
2028 | 9 | 90,000 | |
2029 | 10 | 90,000 | |
2030 | 11 | 90,000 | |
Could you please fill the present value for each year in excel and showing me the formula for each year ?
The concept of interest-rate risk states that changes in the
interest rates may adversely affect the value of an investor's
securities portfolio. While this is not a securities problem, the
relationship between the change in rates and the subsequent change
in the value of an asset hold true. If the the interest rates were
to rise just 1 percent, the present value of the expected savings
would fall below the required $860,000 limit set by mangement. (
That statement is true or false ? )
Could you also write your answers for part b and c, in a
professional email format explaining in detail to a direct
manager.
Thank you.
Present value for
2020 = 110000/(1.07) i.e. 102803.74
2021= 120000/(1.07)2 i.e. 104812.65
2022 = 130000/(1.07)3 i.e. 106118.72
2023 = 150000/(1.07)4 i.e. 114434.28
2024 = 160000/(1.07)5 i.e. 114077.79
2025 = 150000/(1.07)6 i.e. 99951.33
2026 = 90000/(1.11)7 i.e. 43349.26
2027 = 90000/(1.11)8 i.e. 39053.38
2028 = 90000/(1.11)9 i.e. 35183.23
2029 = 90000/(1.11)10 i.e. 31696.60
2030 = 90000/(1.11)11 i.e. 28555.49
a) the value (at the beginning of 2019) of the future cash flow savings expected to be generated by this project is sum of all the present value of cash flow savings calculated above .The total amounts to 820,036.47 ( all calculations were rounded of to two decimal points).
b)Based solely on the one criterion set by management, it is not viable to accept the project .The reason is ,total value of all present value of cash inflows is $ 820,036.47 which is less than the criteria set by management ,that is $860,000
At the end of 2019, Uma Corporation is considering a major long-term project in an effort...
Please answer in step-by-step detail. Thanks! annual return on U.3 At the end of 2019, Uma Corporation is considering a major long-term project effort to remain competitive in its industry. The production and sales departmen determined the potential annual cash flow savings that could accrue to the firm if i soon. Specifically, they estimate that a mixed stream of future cash flow savings occur at the end of the years 2020 through 2025. The years 2026 through 2030 consecutive $90,0000...
It is the end of 2020. You plan to complete a Ph.D. in 5 years. Your favorite uncle has promised to help you with your school expenses by giving you the following amounts for Christmas: Year 2021 2022 2023 2024 2025 Cash flow 1,200 1,600 1,800 2,000 2,200 Your uncle is fairly wealthy and very reliable. You currently have $10,000 in a savings account paying an annual interest rate of 15%. ALL PARTS (1-7) TO BE COMPLETED. Part 1 Create...
Fimbrez Corporation has provided the following data concerning an investment project that it is considering: initial investment.............. $360,000 Annual cash flow............. $118,000 per year Expected life of project..... 4 years Discount rate................... 12% The net present value of the project is closest to: $358,484 $360,000 $(1,516) $112,000
wster's is considering a project with a life of 5 years and an initial cost of $120,000. The discount rate for the project The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for...
M Corporation has provided the following data concerning an investment project that it is considering: Initial investment $ 270,000 Annual cash flow $ 125,000 per year Expected life of the project 4 years Discount rate 10 % The net present value of the project is closest to: $126,125 A $(126,125) B $(145,000) C $270,000 D
Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 10%. The firm expects to sell 2,100 units a year. The expected cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $75,000. If this project sees units fall to 1,960 in the last two years, then...
Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 10%. The firm expects to sell 2,100 units a year. The expected cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $75,000. If this project sees units fall to 1,960 in the last two years, then...
Please answer this fully. This is a major final project so it's crucial I get it right. Thank you so much! You are working in a strategic management role at Best Bean, Inc., a chain of coffee shops. Your team is considering expanding in 2020 by building one or more new retail outlets in the Detroit area. Four locations (A, B, C, and D) are being considered. Locations A, B, and Care ten year investments, with income projections shown in...
Problem 3-Capital Investment Russell Company is evaluating a project which will require an investment of $525,000. The project has an estimated life of 4 years and no salvage value. It is also expected to have the following net income and net cash flow Year Net Income Net Cash Flow $ 85,000 S 150,000 2 3. 4. 60,000 50,000 200,000 160,000 90,000 Russell Company's minimum desired rte of return is 12%. The present value factor of S1 at compound interest of...
Fimbrez Corporation has provided the following data concerning an investment project that it is considering: Initial investment $210,000 Annual cash flow $126,000 per year Expected life of the project 4 years Discount rate 9% Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table. The net present value of the project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)