Question

(Related to Checkpoint 11.1) (Net present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $5,000,000 and would generato annual net cash inflows of $1,000,000 per year for 8 years Calculate the project's NPV using a discount rate of 9 percent.

 If the discount rate is 9 percent, then the project's NPV is _______  (Round to the nearest dollar)

(Net present value calculation) Carson Trucking is considering whether to expand its regional service center in Mohab. UT. The expansion requires the expenditure of $9,000,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,000,000 per year for each of the next 6 years in year 6 the firm will also get back a cash flow equal to the salvage value of the equipment which is valued at $1 million. Thus, in year 6 the investment cash inflow totals $3.000.000 Calculate the projects NPV using a discount rate of 10 percent. 

 If the discount rate is 10 percent, then the project's NPV is _______  (Round to the nearest dollar)

(Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $95,000 and will generate net cash inflows of $17,000 per year for 9 years 

a. What is the project's NPV using a discount rate of 9 percent? Should the project be accepted? Why or why not? 

b. What is the project's NPV using a discount rate of 16 percent? Should the project be accepted? Why or why not? 

c. What is this project's internal rate of return? Should the project be accepted? Why or why not?

Answer 1

SOLUTION :

1. Dowling sportswear :

Initial cost = 5000000 ($)

Discount rate , r = 9% = 0.09

=> (1 + r) = 1.09

Project generates $1000000 per year for 8 years.

So,

NPV 

= - Initial cost + PV of future cash flows

= - 5000000 + 1000000(1.09^8 - 1)/(0.09*1.09^8)

= 534819 ($) 

If the discount rate is 9%, then the project’s NPV = 534819 ($) 

(ANSWER).

2. Carson Trucking  :

Initial cost = 9000000 ($)

Discount rate , r = 10% = 0.1

=> (1 + r) = 1.1

Project generates $2000000 per year for 6 years.

So,

NPV 

= - Initial cost + PV of future cash flows

= - 9000000 + 2000000(1.1^6 - 1)/(0.1*1.1^6)

= - 289479  ($) 

If the discount rate is 9%, then the project’s NPV = - 289479 ($) 

(ANSWER).

3. Big Steve’s  :

a.

Initial cost = 95000 ($)

Discount rate , r = 9% = 0.09

=> (1 + r) = 1.09

Project generates $17000 per year for 9 years.

So,

NPV 

= - Initial cost + PV of future cash flows

= - 95000 + 17000(1.09^9 - 1)/(0.09*1.09^9)

= 6919.20  ($) 

If the discount rate is 9%, then the project’s NPV = 6919.20 ($) 

(ANSWER).

Project is acceptable as NPV is positive. (ANSWER).

b.

If discount rate, r = 16% = 0.16

=> (1+r) = 1.16

So,

NPV 

= - Initial cost + PV of future cash flows

= - 95000 + 17000(1.16^9 - 1)/(0.16*1.16^9)

= - 16688.75 ($) 

If the discount rate is 16%, then the project’s NPV = - 16688.75 ($) 

(ANSWER).

Project is not acceptable as NPV is negative. (ANSWER).

c.

At IRR, NPV = 0 .

Let IRR be r (in decimals).

So, NPV = 0 = 17000((1+r)^9 - 1)/(r(1+r)^9) 

By trial and error, r = IRR = 0.1216938 = 0.1217 approx. 

So, IRR is = 12.17% (ANSWER).

If discount rate is 9%, IRR is higher and project can be accepted.

If discount rate is 16%, IRR is lower and project should not be accepted. (ANSWER).

Answer 2

1)

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