A
Adequate information:
Company can sell
Developing the machine will take
Discount rate is
To compute: Base-case NPV
Introduction: The current value of a stream of payments from a business, project, or investment is determined using
B
Adequate information:
Company can sell
Developing the machine will take
Discount rate is
If unsuccessful, after the first year, the project can be dismantled and will have an after-tax salvage value of
After the first year, expected cash flows will be revised up to
To compute: Revised NPV
Introduction: The current value of a stream of payments from a business, project, or investment is determined using net present value (NPV).
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Corporate Finance
- Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?arrow_forwardCaduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.arrow_forwardAustins cell phone manufacturer wants to upgrade their product mix to encompass an exciting new feature on their cell phone. This would require a new high-tech machine. You are excited about his new project and are recommending the purchase to your board of directors. Here is the information you have compiled in order to complete this recommendation: According to the information, the project will last 10 years and require an initial investment of $800,000, depreciated with straight-line over the life of the project until the final value is zero. The firms tax rate is 30% and the required rate of return is 12%. You believe that the variable cost and sales volume may be as much as 10% higher or lower than the initial estimate. Your boss understands the risks but asks you to explain the alternatives in a brief memo to the board, Write a memo to the Board of Directors objectively weighing out the pros and cons of this project and make your recommendation(s).arrow_forward
- Scenario: The production department is intending on acquiring a more energy-efficient machine. The production manager has asked for your help with evaluating two alternative machine models. Model 1: Requires initial investment of $80,000. The expected cash inflow for the first year is $26,000 and this is expected to grow at 2% per annum. Model 2: Requires initial investment of $120,000. The expected cash inflow for the first year is $38,000 and this is expected to grow at 2.5% per annum. The expected useful life of both machines are six years. The business requires a rate of return of 10%. Create a new Excel workbook and complete the requirements below on one sheet. Present everything in a tidy and formatted manner. Requirements: Set up columns A and B for the input data and input relevant information from the scenario above. Calculate the following for Model 1 and Model 2 using cell references and functions (i.e., no hard coding): a. Projected future cash flows b. Net present value…arrow_forward← FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $214,500 per year. Once in production, the bike is expected to make $296,481 per year for 10 years. The cash inflows begin at the end of year 7. For parts a-c, assume the cost of capital is 9.5%. a. Calculate the NPV of this investment opportunity. Should the company make the investment? b. Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. c. How long must development last to change the decision? For parts d-f, assume the cost of capital is 14.2%. d. Calculate the NPV of this investment opportunity. Should the company make the investment? e. How much must this cost of capital estimate deviate to change the decision? f. How long must development last to change the decision? a. Calculate the NPV of this investment opportunity. If the cost of capital is 9.5%, the NPV is $.…arrow_forward3. A delivery company is expanding its fleet of work vans at an initial cost of $100,000. Operation and maintenance costs for the new vehicles are expected to be $20,000/year for the next 10 years. After 10 years, the vans will be sold for a total of $10,000. The annual revenue increase associated with this fleet upgrade is expected to be $50,000. What is the company's rate of return on this investment?arrow_forward
- Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.97 million. The product is expected to generate profits of $1.08 million per year for ten years. The company will have to provide product support expected to cost $99,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 6.2%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.2%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment?arrow_forwardInnovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of $1.15 million per year for 10 years. The company will have to provide product support expected to cost $99,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 5.6% ? Should the firm undertake the project? Repeat the analysis for discount rates of 1.3% and 16.3%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment? a. What is the NPV of this investment if the cost of capital is 6.2%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.1% and 17.8%, respectively. If the cost of capital is 6.2%, the NPV will be $ (Round to the nearest dollar.) answer this Should the firm undertake the project? (Select the…arrow_forwardManagement of Sunland Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $266,550 and will generate cash flows of $81,750 over each of the next six years. If the cost of capital is 15 percent, what is the MIRR on this project? - MMR = ? %arrow_forward
- es United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $150,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.50 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $500,000. Finally, the project requires an immediate investment in working capital of $400,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $5.20 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing…arrow_forwardes eEgg is considering the purchase of a new distributed network computer system to help handle Its warehouse Inventories. The system costs $55,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing Inventories by $60,000 per year. The firm's cost of capital (discount rate) is 10%. Required: 1. What is the net present value (NPV) of the proposed Investment under each of the following Independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C. TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 22% Income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 22% Income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…arrow_forwardeEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,000 per year. The firm’s cost of capital (discount rate) is 10%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 30% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…arrow_forward
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