1. Compute the expected net present value and comment on the acceptability of the projectconsidering the associated risk. Midlands Ltd is considering introducing a machine to its manufacturing process that will cost£80,000. The machine will save the company £17,200 annually. The risk manager of thecompany has provided the following probability distribution of the best estimate of themachine's expected useful life and scrap value of the materials used in building the extension.Midlands Ltd overall cost of capital is 10%.ProbabilityExpected Life SpanScrap Value25%4£25,000V40%6£18,00035%3£35,000Required:

We will use the concept of time value of money here. As per the concept of time value of money the…

Answered: Compute the expected net present value…

Business

Finance

Compute the expected net present value and comment on the acceptability of the project considering the associated risk.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

1. Compute the expected net present value and comment on the acceptability of the project considering the associated risk.

Midlands Ltd is considering introducing a machine to its manufacturing process that will cost
£80,000. The machine will save the company £17,200 annually. The risk manager of the
company has provided the following probability distribution of the best estimate of the
machine's expected useful life and scrap value of the materials used in building the extension.
Midlands Ltd overall cost of capital is 10%.
Probability
Expected Life Span
Scrap Value
25%
4
£25,000
V
40%
6
£18,000
35%
3
£35,000
Required:

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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