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 a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,850,000 and will last 10 years. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $230,00o. She estimates that the return from owning her own shop will be $45,000 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? 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? 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 too the nearest dollar. $ The shop be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated 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

Answer 1

a Campbell manufacturing camole Initial Investment = $ Q, sent : $ 2,850,000 + Cash How peryr = $ 480, . Project life = 10 years Discounted rate = 12%. present value of discounted of = 4. where, = rate of interest t- Time interval The cumulative discounted of 6.6502. Net presentvalue = cumulative discoute 121 for lours be discounted CF OF Wattve discouted cf ☺ Initial Investment Here, cumulative discoveted CP - $ 480,000 * 5.6502 = $2,712,096 ; Npy = $2.712,096 - $ 2850,000 1 , $ ( 137904) : There is negative npw of $ (13 7904) E The company should reject the new welding System

b) Evec cardenas estment - $ 230,000 000 cash blow per yo - $ 45,00 through Shop Project life = 6 yos. Required rate of = 87. return quered rate of return indicale discounted rate ual acby p 87. У бум ④ Initial Investact = Discarted ef sut value Cumulative Annuity factor for 87. .. . 4.6218 Net presut value - Discarted ef E Discouted of a 4.6228 * $ 45,000 = $ 208026. : Mpx - $208,026 © 239000 c = $(21974) : Nipy is negative The project should be rejected D. Return = 8 135000 Discouted cif 4.6228 * $135000 = $624078 Npv = $624078 © $ 230000 = $394078 e diff in estimated cash floud It should be purcha

c) Barker company, Given, Mpy of profeet = 1 62,900 Annual 4 - 1 135000 progreet life - 2 years Required voli = 10. of retum cumulative Annuity factor for not for logo is 5.3343. - cumulative discouted of is 5.334.3 * $135000 $ 72013) Mpy - Cumulative Discouted of ☺ Inihal investme Initial investment = wimulatiue discr o Mpy = $7201310 63900 = $ 656231 :. Inihal Investment : $ 65623)