NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering The initial investment is $24,950, and the project will yield cash inflows of $8,000 per year for 5 years. The firm has cost of capital of 15%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is S. (Round to the nearest cent.) b. The IRR of the project is %. (Round to two decimal places.) c. Would you recommend that the firm accept the project? (Select the best answer below.) OYes O No

NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering The initial investment is $24,950, and the project will yield cash inflows of $8,000 per year for 5 years. The firm has cost of capital of 15%. a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is S. (Round to the nearest cent.) b. The IRR of the project is %. (Round to two decimal places.) c. Would you recommend that the firm accept the project? (Select the best answer below.) OYes O No

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7PA: There are two projects under consideration by the Rainbow factory. Each of the projects will require...

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Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?
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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: Use the information from the previous exercise to calculate the internal rate of return on both projects and make a recommendation on which one to accept. For further instructions on internal rate of return in Excel, see Appendix C.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
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: If the discount rate is 12%, compute the NPV of each project.