2559 Words11 Pages

Net Present Value/Present Value Index The management team at Savage Corporation is evaluating two alternative capital investment opportunities. The first alternative, modernizing the company’s current machinery, costs $45,000. Management estimates the modernization project will reduce annual net cash outflows by $12,500 per year for the next five years. The second alternative, purchasing a new machine, costs $56,500. The new machine is expected to have a five-year useful life and a $4,000 salvage value.

Management estimates the new machine will generate cash inflows of $15,000 per year. Savage’s cost of capital is 10%. Required

a. Determine the present value of the cash flow savings expected from the modernization*…show more content…*

Indicate whether the investment opportunity should be accepted.

The Internal Rate of Return appears to be higher than the established investment opportunity hurdle rate of 15 percent therefore it would be a good idea to accept this investment opportunity.

Exercise 24-6A Determining net present value

Travis Vintor is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Travis expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows. Year of Operation Cash Inflow Cash Outflow

2006 $5,400 $3,600

2007 7,800 4,800

2008 8,400 5,040

2009 8,400 5,040 In addition to these cash flows, Mr. Vintor expects to pay $8,400 for the equipment. He also expects to pay $1,440 for a major overhaul and updating of the equipment at the end of the second year of

Management estimates the new machine will generate cash inflows of $15,000 per year. Savage’s cost of capital is 10%. Required

a. Determine the present value of the cash flow savings expected from the modernization

Indicate whether the investment opportunity should be accepted.

The Internal Rate of Return appears to be higher than the established investment opportunity hurdle rate of 15 percent therefore it would be a good idea to accept this investment opportunity.

Exercise 24-6A Determining net present value

Travis Vintor is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Travis expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows. Year of Operation Cash Inflow Cash Outflow

2006 $5,400 $3,600

2007 7,800 4,800

2008 8,400 5,040

2009 8,400 5,040 In addition to these cash flows, Mr. Vintor expects to pay $8,400 for the equipment. He also expects to pay $1,440 for a major overhaul and updating of the equipment at the end of the second year of

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