Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Consider a project to supply your church with 55,000 gallons of hand
sanitizer annually for church services. You estimate that you will need an
initial Gh¢4,200,000 in terms of investment to get the project started. The
project will last for 5 years.
The project will bring in annual cash flows of Gh¢1,375,000. It also
estimates a salvage value of Ghç300,000 after dismantling costs.
Your cost of capital is 13 percent. Assume no taxes or depreciation.
Required:
a) What is the NPV of the sanitizer project? Should you pursue this
project?
b) Suppose you believe that there is a best case scenario where
initial investment could be 15% lower with salvage value and
revenue being 10% higher, what would be the NPV under this
scenario?
c) In the worst case scenario, you expect annual cash inflows to be
10% lower, salvage value to be 12% lower and initial investment to
be 10% higher. Calculate the NPV under this worst case scenario.
Would you still pursue the project?
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Transcribed Image Text:Consider a project to supply your church with 55,000 gallons of hand sanitizer annually for church services. You estimate that you will need an initial Gh¢4,200,000 in terms of investment to get the project started. The project will last for 5 years. The project will bring in annual cash flows of Gh¢1,375,000. It also estimates a salvage value of Ghç300,000 after dismantling costs. Your cost of capital is 13 percent. Assume no taxes or depreciation. Required: a) What is the NPV of the sanitizer project? Should you pursue this project? b) Suppose you believe that there is a best case scenario where initial investment could be 15% lower with salvage value and revenue being 10% higher, what would be the NPV under this scenario? c) In the worst case scenario, you expect annual cash inflows to be 10% lower, salvage value to be 12% lower and initial investment to be 10% higher. Calculate the NPV under this worst case scenario. Would you still pursue the project?
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