Question

Mark:__/5 Chapter 12 FMGT 2152 CHAPTER 12 ASSIGNMENT Name: Last 3digits of student#: Question 1 Bovril Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $900,000. Projected net cash inflows are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $260,000 $250,000 $225,000 $210,000 $200,000 $175,000 Required 1. Compute the Net Present Value (NPV) of the project using a 10% hurdle rate (minimum rate of return). Should Bovril buy the equipment? Explain your reasoning. NPV Calculation Final NPV Here Should the Company Invest in the Equipment? Yes No Explain your answer

Answer 1

Solution to the QUESTION-1

The Net Present Value (NPV) of the Project

Year	Annual cash flows ($)	Present Value Factor (PVF) at 10.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	260,000	0.9090909	236,363.64
2	250,000	0.8264463	206,611.57
3	225,000	0.7513148	169,045.83
4	210,000	0.6830135	143,432.83
5	200,000	0.6209213	124,184.26
6	175,000	0.5644739	98,782.94
TOTAL			978,421.06

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $978,421.06 - $900,000

= $78,421.06

“Hence, the Net Present Value (NPV) of the Project will be $78,421.06”

DECISION

YES. The Project should be accepted, since the Net Present Value (NPV) of the Project is Positive $78,421.06.

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.