Problem 18. cash flow Philips industries runs a small manufacturing operation. f
ID: 2668790 • Letter: P
Question
Problem 18. cash flow Philips industries runs a small manufacturing operation. for this fiscal year, it expect real net cash flows of 155,000. Phillips in an ongoing operation, but it expect competitive pressures to erode its real net cash flow at 5 percent per year in perpetuity. the appropriate real discount rate for Phillips is 11 percent. All net cash flow are received at year-end. what is the present value of the net cash flows form Phillips operation?Problem 26
EAC and inflation Office Automation, inc must choose between two copiers, the XX40 or RH45. The XX40 costs 1,500 and will last for three years. the copier will require a real after tax cost of $120 per year after all relevant expenses. The RH45 costs 2,300 and will last five years. the real after tax cost for the RH45 will be $150 per year. All cash flow occur at the end of the year. the inflation rate is expected to be 5 percent and the nominal discount rate is 14 percent. which copier should the company choose?
Explanation / Answer
P18. We have annual Payments PMT = 155000 Disc Rate r=11% & g = 5% A eroding perpetuity is a cash flow that is expected to erode at a constant rate. The present value of a eroding perpetuity can be written as: PV of eroding perpetuity (PVEP) = CF1/(r+g) where CF1 is the expected cash flow next year, g is the constant eroding rate and r is the discount rate. So PVEP = 155000/(11%+5%) = $968,750 P26. Real Disc rate = Nominal Disc Rate - Inflation = 14-5=9% Let XX40 Be Copier A & RH45 be Copier B Cop A: Dep pa = 1500/3 = 500 SO Net CF = After Tax CF + Dep written back = 120+500=620 NPV of CopA = NPV(Rate, CF1,CF2.CF3) + CF0 = NPV(9%,620,620,620)-1500 = $69...(1) Cop B: Dep pa = 2300/5 =460 SO Net CF = After Tax CF + Dep written back = 150+460=610 NPV of CopA = NPV(Rate, CF1,CF2,CF3,CF4,Cf5) + CF0 = NPV(9%,610,610,610,610,610,) -2300 = $73 .....(2) So company should go for COp B ie RH45 as it has a higher NPV.