Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Enter amounts that represent cash outflows as negative numbers using a minus sign. Round the present value of annual net cash flows to the nearest dollar. Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 1 0.909 0.833 5 3.791 2.991 10 6.145 4.192 Alpha Beta Gamma Annual net cash flow Present value factor Present value of annual net cash flows Amount to be invested Net present value
Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Enter amounts that represent cash outflows as negative numbers using a minus sign. Round the present value of annual net cash flows to the nearest dollar. Present Value of an Annuity of $1 at Compound Interest (Partial Table) Year 10% 20% 1 0.909 0.833 5 3.791 2.991 10 6.145 4.192 Alpha Beta Gamma Annual net cash flow Present value factor Present value of annual net cash flows Amount to be invested Net present value
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter7: Allocating Costs Of Support Departments And Joint Products
Section: Chapter Questions
Problem 17E
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HomeGrown Company is a chain of grocery stores that are similar to indoor farmer's markets, providing fresh, local produce, meats, and dairy products to consumers in urban areas. HomeGrown is considering opening several stores in a new city, and has proposals from three contractors (Alpha, Beta, and Gamma companies) who would like to provide buildings for the new stores.
The amount of expected revenue from the stores will depend on the design of the contractor. For example, if HomeGrown decides on a more open floor plan, with less shelf space for products, revenue would be lower overall. However, if HomeGrown decides on a very crowded floor plan, it may lose customers who appreciate a more open feel.
As the project manager for HomeGrown, you are responsible for deciding which if any of the proposals to accept. HomeGrown's minimum acceptable rate of return is 20%. You receive the following data from the three contractors:
Proposal
|
Type of Floor Plan
|
Initial Cost if Selected
|
Residual Value
|
Alpha | Very open, like an indoor farmer’s market | $1,472,000 | $0.00 |
Beta | Standard grocery shelving and layout, minimal aisle space | 5,678,900 | 0.00 |
Gamma | Mix of open areas and shelving areas | 2,325,760 | 0.00 |
You have computed estimates of annual cash flows and average annual income from customers for each of the three contractors' plans. You believe that the annual cash flows will be equal for each of the 10 years for which you are preparing your capital investment analysis. Your conclusions are presented in the following table.
Proposal
|
Estimated Average
|
|
Annual Income
|
Estimated Average
|
|
(after
|
Annual Cash Flow
|
|
Alpha | $324,134 | $351,145 |
Beta | 286,217 | 461,411 |
Gamma | 582,719 | 648,654 |
1.
Compute the net present value of each proposal. You may need the following partial table of factors for present value of an annuity of $1. Enter amounts that represent cash outflows as negative numbers using a minus sign. Round the present value of annual net cash flows to the nearest dollar.
Present Value of an Annuity of $1 at
|
||
Year | 10% | 20% |
1 | 0.909 | 0.833 |
5 | 3.791 | 2.991 |
10 | 6.145 | 4.192 |
Alpha | Beta | Gamma | |
Annual net cash flow |
|
|
|
Present value factor |
|
|
|
Present value of annual net cash flows |
|
|
|
Amount to be invested |
|
|
|
Net present value |
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|
|
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