The Seattle Corporation has been presented with an investment yield end of year cash flows of $30,000 in Year 1, $35,000 per year in Years 2 and 3, $45,000 in Year 4, and $50,000 in Year 5. This investment will cost the firm $135,000 today, and the firm's cost of capital is 10 percent. What is the NPV for this investment? A) ($ 5,724) O B) ($ 2,047) Oa $1,569 O D) $5,341 59.276 Page 7 of 39

The Seattle Corporation has been presented with an investment yield end of year cash flows of $30,000 in Year 1, $35,000 per year in Years 2 and 3, $45,000 in Year 4, and $50,000 in Year 5. This investment will cost the firm $135,000 today, and the firm's cost of capital is 10 percent. What is the NPV for this investment? A) ($ 5,724) O B) ($ 2,047) Oa $1,569 O D) $5,341 59.276 Page 7 of 39

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 19EA: Redbird Company is considering a project with an initial investment of $265,000 in new equipment...

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Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
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