Question

Net Present Value

Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount.

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

1. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,650,000 and will last 10 years.
2. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $230,000. She estimates that the return from owning her own shop will be $35,000 per year. She estimates that the shop will have a useful life of 6 years.
3. 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.
$

Should she invest?
No

What if the estimated return was $135,000 per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar.
$

The shop should now be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated cash flow

3. What was the required investment for Barker Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar.
$

Exhibit 12B.1 Present Value of a Single Amount* 9 25° 0.96154 0.95238 0.94340 0.93458 0.92593 0.91743 0.90909 0.8 344 62 0.81630 0.79383 0.77218 0.75131 0.71178 0.67497 0.64066 0.60863 0.57870 0.51200 0.45517 63552 0.59208 0.55229 0.51579 0.48225 0.40960 0.35013 0.85480 0.82270 0.79209 0.76290 0.73503 0.70843 0.68301 0.94205 0.88797 0.83748 0.79031 0.74622 0.7 0.66634 0.63017 0.59627 0.56447 0.50663 0.45559 0.41044 0.37043 0.33490 0.26214 0.2071 0.66506 0.62275 0.58349 0.54703 0.51316 0.45235 0.39964 0.35383 0.31393 0.27908 0.20972 0.15937 30503 0.26604 0.23257 0.16777 0.12259 8 0.92348 0.85349 0.78941 0.73069 0.67684 0.62741 0.58201 0.54027 0.50187 0.46651 0.40388 0.3505 7025 67556 0.61391 0.55839 0.50835 0.46319 0.42241 0.38554 0.32197 0.26974 0.226 0.19106 0.16151 0.10737 0.07254 11 0.89632 0.80426 0.72242 0.64958 0.58468 0.52679 0.47509 0.42888 0.38753 0.35049 0.28748 0.23662 0.19542 0.16192 0.13459 0.08590 0.0558 16846 0.13722 0.11216 0.06872 0.04292 0.66112 0.57748 0.50507 0.44230 0.38782 0.34046 0.29925 0.26333 0.20462 0.15971 0.12520 0.09 4301 0.64186 0.55526 0.48102 0.41727 0.36245 1524 0.27454 0.23939 0.18270 0.14010 0.10793 0.08352 0.06491 0.03518 8 2 4438 0.71416 0.60502 0.51337 0.43630 0.37136 0.31657 0.27027 0.23107 0.19784 0.14564 0.10780 0.08021 0.059 83602 0.70016 0.58739 0.49363 0.41552 0.35034 0.29586 0.25025 0.21199 0.17986 0.13004 456 0.06914 0.05083 0.03756 0.01801 0.00889 954 0.67297 0.55368 0.45639 0.376 0.31180 0.25842 0.21455 0.17843 0.14864 0.10367 0.07276 0.05139 0.03651 0.02608 0.01153 0.0052 894 0.29416 0.24151 0.19866 0.16370 0.13513 0.09256 0.06383 0.04430 0.03094 0.02174 0.00922 0.00405 22 0.80340 0.64684 0.52189 0.42196 0.34185 0.27751 0.22571 0.18394 0.15018 0.12285 0.08264 0.05599 φ0819 0.02522 00131, 000738 0.003m 5 24 0.78757 0.62172 0.49193 0.39012 0.31007 0.24 25 0.77977 0.60953 0.47761 0.37512 0.29530 0.23300 0.18425 0.14602 0.11597 0.09230 0.05882 0.03779 0.02447 0.01596 0.01048 0.00378 0.00142 19715 0.15770 0.12640 0.10153 0.06588 0.04308 0.02838 0.01883 0.01258 0.00472 0.00184 24 0.21981 0.17220 0.13520 0.10639 0.08391 0.05252 0.03315 0.0210 27 0.76440 0.58586 0.45019 0.34682 0.26785 0.20737 0.16093 0.12519 0.09761 0.07628 0.04689 0.02908 0.01818 0.01146 0.00728 0.00242 0.000 28 0.75684 0.57437 0.43708 0.33348 0.25509 0.19563 0.15040 0.11591 0.08 4 0.06934 0.04187 0.02551 0.01567 0.00971 0.00607 0.00193 0.00065 11 0.42435 0.32065 0.24295 0.18456 0.14056 0.10733 0.08215 0.06304 0.03738 0.02237 0.01351 0.00823 0.00506 0.00155 0.00050 3 0.

Answer 1

Answer: 1
Information Given
Investment in the beginning	$2,650,000
Per year inflow	$480,000
Period	10 years
Required rate of return	12%
	INFLOW PER YEAR	PV@12% FACTOR FOR 10 YEARS	PV OF INFLOWS
PRESENT VALUE OF INFLOWS FOR 10 YEARS	480000	5.65022	2712106
PRESENT VALUE OF OUTFLOWS			2650000
NET PRESENT VALUE			62106
DECISION
YSE CAMPBELL MANUFACTURING SHOULD INVEST IN THE PROJECT AS THE NET PRESENT VALUE FOR THE PROJECT IS POSITVIE I.E. $62106
Answer: 2
Information Given
Investment in the beginning	$230,000
Per year inflow	$35,000
Period	6 years
Required rate of return	8%.
	INFLOW PER YEAR	PV@8% FACTOR FOR 6 YEARS	PV OF INFLOWS
PRESENT VALUE OF INFLOWS FOR 6 YEARS	35000	4.62288	161801
PRESENT VALUE OF OUTFLOWS			230000
NET PRESENT VALUE			-68199
DECISION
NO, EVEE CARDENAS SHOULD NOT INVEST IN THE PROJECT AS THE NET PRESENT VALUE FOR THE PROJECT IS NEGATIVE I.E. -$68199
IF RETURN PER YEAR CHANGES TO	$135,000
	INFLOW PER YEAR	PV@8% FACTOR FOR 6 YEARS	PV OF INFLOWS
PRESENT VALUE OF INFLOWS FOR 6 YEARS	135000	4.62288	624089
PRESENT VALUE OF OUTFLOWS			230000
NET PRESENT VALUE			394089
DECISION
YES, EVEE CARDENAS SHOULD INVEST IN THE PROJECT AS THE NET PRESENT VALUE FOR THE PROJECT IS POSITVIE I.E. $394089. MORE OVER THIS TELLS US THAT IF RETURN PER YEAR IS CHANGED TO $135000 THIS WILL MAKE THE PROJECT VIABLE AS THE NPV BECOMES POSITIVE SO CHANGE IN RETURN DO EFFECT THE DECISION MAKING.
Answer: 3
Information Given
Per year inflow	$135,000
Period	8
Required rate of return	10%
NPV	$63,900
	INFLOW PER YEAR	PV@10% FACTOR FOR 8 YEARS	PV OF INFLOWS
PRESENT VALUE OF INFLOWS FOR 8 YEARS	135000	6.71008	905861
Investment in the Project	=PV OF INFLOWS+NVP
Investment in the Project	=905861+63900
	$969,761
So the required investment for the Barker Company's project is $969761