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?

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?

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 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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