Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Down Under stores are considering an investment with an intial cost of $236,00. In Year 4, the project will require an additional investment and finally, the project will be shut down in Year 7. The annual cash flows for Years 1 - 7 are projected as $64,000, $87,000 $91,000, -$48,000, $122,000, $154,000, and -$30,000. If all negative cash flows are moved to Time 0 using a discount rate of 13%, what is the project's modified
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- I want you to show and explain the explanation below. The answer is correct but i can't understand how it come up with the right answer. Attached pic below is the problem The annual estimated cash flow is $140,000. The salvage value will be 12% of the initial price after 5 years. The discount rate (r) is 18% Let us assume the initial price of the doughnut machine be X. PV of cash inflows=PV of cash outflows$140,000×PVAF4,18%+.12X×PVF5,18%=X$140,000×2.69006180465+.12X×0.43710921621=X$376,608.652651=X-0.05245310594$376,608.652651=0.94754689406XX=$397,456.479475 The maximum purchase price of the doughnut machine is $397,456.48.arrow_forwardPlay Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.4million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows: Play will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%. Annual Net CashAnnual Inflows Year Toy action figure project Sandbox toy project Year 1. . . . . . . . . . . $305,450 $550,000 Year 2. . . . . . . . . . . 305,450 350,000 Year 3. . . . . . . . . . . 305,450 310,000 Year 4. . . . . . . . . . . 305,450 270,000 Year 5. . . . . . . . . . . 305,450 25,000 Total $1,527,250 $1,505,000 Calculate the toy action figure project's payback period. If the toy action figure project had a residual value of $150,000,would the payback period change? Explain and…arrow_forwardQuality Tools, Inc. needs to purchase a new machine costing $2.08 million. Management is estimating the machine will generate cash inflows of $396,000 for two years and $300,000 for the following seven years. If management requires a minimum 8 percent rate of return, should the firm purchase this particular machine? Why or why not? a) no; because the IRR is .68 percent b) no; because the IRR is 7.57 percent c) The answer cannot be determined as there are multiple IRRs d) yes; because the IRR is 10.38 percent e) yes; because the IRR is 8.47 percentarrow_forward
- Blossom Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. The firm uses an 18 percent discount rate for projects like this. Should management go ahead with the project? Year Cash Flow 0 -$2,970,000 1 787,610 2 869,600 3 1,030,500 4 1,125,360 5 1,354,000 What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.) The NPV is $enter The NPV in dollars rounded to 0 decimal places Should management go ahead with the project? The firm should select an option rejectaccept the project.arrow_forwardCalculating IRR, payback, and a missing cash flow. the merriweather printing company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as follows. year. Project cash flows 0 ? 1 $780,000 2 $420,000 3 $310,000 4 $480,000 if you know that the project has a regular payback of 2.6 years, what is the project's IRR?arrow_forwardRapp Hardware is adding a new product line that will require an investment of $1,418,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $320,000 the first year, $270,000 the second year, and. $240,000 each year thereafter for eight years. Assume the project has no residual value. Compute the ARR for the investment. Round to two places. Select the formula, then enter the amounts to calculate the ARR (accounting rate of return) for the new product line. (Round ARR to the nearest hundredth percent [two decimal places], X.XX%.) Average annual operating income +Average amount invested = ARR = %arrow_forward
- There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,500 $23,000 $5,500 $61,000 Beta Project 8,000 23,000 28,000 59,000 (Click here to see present value and future value tables) https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money A. If the discount rate is 12%, compute the NPV of each project. Round your present value factor to three decimal places and final answer to answer to 2 decimal places. Alpha Project...? Beta Project...?arrow_forwardBlur Corp. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three-year useful life, and it will not have any salvage value at the end of the project’s life. If demand is strong, the facility will be able to generate annual cash flows of $250,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $120,000. Blur Corp. thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? -$66,346 -$63,187 -$34,753 -$44,231 Blur Corp. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand turns out to be weak in year 1. If the…arrow_forwardSarasota Compacts will generate cash flows of $29,200 in year 1, and $66,200 in year 2. However, if it makes an immediate investment of $19,100, it can instead expect to have cash streams of $54,600 in total in year 1 and $61,700 in year 2. The appropriate discount rate is 9 percent. Calculate the NPV of the proposed project. (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer to 2 decimal places, e.g. 25.25.) +A NPV $arrow_forward
- Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $137,956. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,900, and annual cash outflows would increase by $42,000. Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.52.) Cash payback period _________? enter the Cash payback period in years rounded to 2 decimal places years.arrow_forwardVijayarrow_forwardWildhorse Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. The firm uses an 18 percent discount rate for projects like this. Should management go ahead with the project? Year 0 1 2 3 4 5 Cash Flow -$3,485,400 871,710 896,700 1,104,400 1,340,360 1,450,600 What is the NPV of this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to O decimal places, e.g. 1,525.) The NPV is $arrow_forward
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