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Net Present Value
Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to increase by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating expenses are estimated at $820,000. The required rate of return is 8%.
Required:
Prepare a schedule of the projected annual cash flows.
Calculate the NPV using only discount factors from Exhibit 12B.1 (p. 670).
Calculate the NPV using discount factors from both Exhibits 12B.1 and 12B.2 (p. 671).
1.
Construct a schedule of the projected cash flows.
Schedule of the Projected Cash Flows:
A schedule that shows the projected inflows and outflows of cash for an upcoming period, often a year is known as a schedule of the projected cash flows. These projected cash flows help to make the capital investment decision.
Schedule of the projected cash flows:
| Year | Item | Cash flow($) |
| 0 | Equipment | (1,500,000) |
| Â | Working capital |
2.
Compute NPV using Exhibit 12B.1.
3.
Compute NPV using both Exhibit 12B.1 and 12B.1.
Chapter 12 Solutions
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