Net Present Value Holland, Inc., has just completed development of a new cell ph
ID: 2376273 • Letter: N
Question
Net Present Value
Holland, Inc., has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,350,000. Producing the cell phone requires an investment in new equipment, costing $1,440,000. The cell phone has a projected life cycle of five years. After five years, the equipment can be sold for $180,000. Working capital is also expected to increase by $180,000, which Holland will recover by the end of the new product's life cycle. Annual cash operating expenses are estimated at $810,000. The required rate of return is 8 percent.
Start with initial investment and increase in working capital (cash decrease). Years 1-4 record revenues and expenses. Year 5, record revenue and expenses. Add equipment salvage value and working capital.
2. Calculate the NPV using only discount factors from Exhibit 14B-1. Round present value calculations and your final answer to the nearest whole dollar.
$
3. Calculate the NPV using discount factors from both Exhibit 14B-1 and Exhibit 14B-2. Round present value calculations and your final answer to the nearest whole dollar.
$
NPV and IRR, Mutually Exclusive Projects
Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below.
Hardy Inc. intends to invest in one of two competing types of computer-aided manufacturing equipment: CAM X and CAM Y. Both CAM X and CAM Y models have a project life of 10 years. The purchase price of the CAM X model is $3,000,000, and it has a net annual after-tax cash inflow of $750,000. The CAM Y model is more expensive, selling for $3,500,000, but it wil produce a net annual after-tax cash inflow of $875,000. The cost of capital for the company is 10 percent.
1. Calculate the NPV for each project. Round present value calculations and your final answers to the nearest dollar.
Which model would you recommend?
SelectCAM XCAM YbothneitherItem 3
2. Calculate the IRR for each project.
Which model would you recommend?
SelectCAM XCAM YbothneitherItem 6
Use the Exhibit 14B-1 and Exhibit 14B-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. Compute the NPV for Southward Manufacturing, assuming a discount rate of 12 percent. Round to the nearest dollar.
$
Should the company buy the new welding system?
SelectYesNoItem 2
2. Conceptual Connection: Assuming a required rate of return of 8 percent, calculate the NPV for Kaylin Day's investment. Round to the nearest dollar.
$
Should she invest?
SelectYesNoItem 4
Calculate the NPV assuming the estimated return was $45,000 per year. Round to the nearest dollar.
$
Would this affect the decision? What does this tell you about your analysis?
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
3. What was the required investment for Goates Company%u2019s project? Round to the nearest dollar.
$
CHECKMARKS ARE CORRECT ANSWERS JUST NEED HELP WITH BLANK BOXES
CAM X: $ CAM Y: $Explanation / Answer
1)
Amount (A) Present Value Factor 8% (B) Discounted Cash Inflow (A*B)
Initial Cash Outflow -1620000 1 -1620000
Year 1 - Cash Inflow 540000 0.92593 500002
Year 2 - Cash Inflow 540000 0.85734 462964
Year 3 - Cash Inflow 540000 0.79383 428668
Year 4 - Cash Inflow 540000 0.73503 396916
Year 5 - Cash Inflow 900000 0.68058 612522
NPV
781072
NPV = 781072
3.
NPV = - 1620000 + 540000*(3.99271) + 360000*(.68058) = 781072
1.NPV CAM X=1608425.3293
NPV CAM y= 1876496.2175
model cam y should be chosen
2. IRR=21.41%
CAM Y IRR=21.41%
both have same IRR but as per NPV CAM y should be selected
1. NPV of southward= 10089.2114
Yes he should buy as NPV is positive.
2.NPV=-18199.2118
no, she should not invest as NPV is negative
NPV=28029.5849
yes this affects the decision.if inflow becomes 45000 then NPV is positive so, he can invest in it....