Question

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,250,000 and will last 10 years. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $40,000 per year. She estimates that the shop will have a useful life of 6 years. c. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV. Should the company buy the new welding system? Yes 2. Conceptual Connection: Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.

Answer 1

1 Competation of NPV NPV = [present value of cash inflows] [Initial investment = [$ 480,000 Xpraf@ 12% for 10 years) $ 2250 000 3 [$480000 x 5.6502] - $ 2250000 1 $ 2712096.-..$ 2.250 000 $ 462096 Ili: NPV = $ 462096 should the company buy the new - Welding system?

3) computation of NPV we can use the above formula = [ $40.000 XP v Af @ 8.1. for 6 years] L$ 2,80,000) = $40.000 x 4.6229] - $ 280,000] $ 184916 - $ 280,000 - $95084 1. NPV = - $95084 9) Calevelation of fost Bitial outlay NPV = $63900 $135000X 5.3349 3(=fe@BEOOTDital - anvestment $720212 - Initial investment = $63900 Initial anvestment = $656312]