Division D is considering two possible expansion plans. Plan A would expand a cu
ID: 2478865 • Letter: D
Question
Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,550,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,000,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10years, the estimated useful life of the product line. Estimated residual value for Plan B is $1,200,000. Division D uses straight-line depreciation and requires an annual return of 9%.
Caclulate the NPV (net present value) of each plan. Begin by calculating the NPV of Plan A.
Annuity PV Factor
(i=9%, n=10)
PV Factor
(i=9%,n=10)
?
Calculate the NPV of Plan B.
Years Net Cash InflowAnnuity PV Factor
(i=9%, n=10)
PV Factor
(i=9%,n=10)
Present Value 1-10 Present Value of Annuity ? ? ? 10 Present Value of Annuity?
? ? Total PV of Cash inflows ? 0 Initial Investment ? Net Present Value ?Explanation / Answer
Plan A Years Net Cash Inflow Annuity PV Factor PV Factor Present Value (i=9%, n=10) (i=9%,n=10) 1-10 Present Value of Annuity 1625000 6.42 10432500 10 Present Value of Annuity 0 0.42 0 Total PV of Cash inflows 1625000 10432500 0 Initial Investment 8550000 1 8550000 Net Present Value 1882500 Plan B Years Net Cash Inflow Annuity PV Factor PV Factor Present Value (i=9%, n=10) (i=9%,n=10) 1-10 Present Value of Annuity 1090000 6.42 6997800 10 Present Value of Annuity 1200000 0.42 504000 Total PV of Cash inflows 2290000 7501800 0 Initial Investment 8000000 1 8000000 Net Present Value -498200