A firm is considering a new project that requires an investment of $1,000,000. The firm plans to raise $ 500,000 through crowd funding and finance the remaining $500,000 through a bank loan with an interest rate of 7%. The project is expected to generate cash flows of $200,000 per year for the next 6 years. Required: What is the net present value (NPV) of the project, assuming a discount rate of 10% ? Should the firm take this project? (10 Points) * (4) - $363,261.11; No. $363,261.11; Yes - $259, 123.67: No. - $ - 259, 123.67; Yes. A firm is considering a new project that requires an investment of $1,000,000. The firm plans to raise $500,000 through crowd funding and finance the remaining $500,000 through a bank loan with an interest rate of 7%. The project is expected to generate cash flows of $200,000 per year for the next 6 years. Required: What is the net present value (NPV) of the project, assuming a discount rate of 10% ? Should the firm take this project? (10 Points) [Q $363,261.11; No. $363,261.11; Yes. $259,123.67; No. -$259,123.67; Yes.

A firm is considering a new project that requires an investment of $1,000,000. The firm plans to raise $ 500,000 through crowd funding and finance the remaining $500,000 through a bank loan with an interest rate of 7%. The project is expected to generate cash flows of $200,000 per year for the next 6 years. Required: What is the net present value (NPV) of the project, assuming a discount rate of 10% ? Should the firm take this project? (10 Points) * (4) - $363,261.11; No. $363,261.11; Yes - $259, 123.67: No. - $ - 259, 123.67; Yes. A firm is considering a new project that requires an investment of $1,000,000. The firm plans to raise $500,000 through crowd funding and finance the remaining $500,000 through a bank loan with an interest rate of 7%. The project is expected to generate cash flows of $200,000 per year for the next 6 years. Required: What is the net present value (NPV) of the project, assuming a discount rate of 10% ? Should the firm take this project? (10 Points) [Q $363,261.11; No. $363,261.11; Yes. $259,123.67; No. -$259,123.67; Yes.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

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Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
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Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
If a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
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