Question

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:

Two present value tables are provided: Present Value of a Single Amount and Present Value of an Annuity. Use them as directed in the problem requirements.

1. Prepare a schedule of the projected annual cash flows. If an amount is negative or an outflow, first enter a minus sign (-).

Snow Inc.
Projected Annual Cash Flows
Year 0
Equipment	$
Working capital
Total	$
Years 1-4
Revenues	$
Operating expenses
Total	$
Year 5
Revenues	$
Operating expenses
Salvage
Recovery of working capital
Total	$

Feedback

Enter the amount description of the cash flow and the amount of each cash increase or decrease and total the amount for the year. Amounts are not discounted and amounts for years 1-4 are per year amounts, rather than the sum of the amounts in years 1-4.

2. Calculate the NPV using only discount factors from the Present Value of a Single Amount table shown in Present Value Tables. Round the present value calculation and your final answer to the nearest whole dollar.

The NPV using the present value of a single amount table is $.

3. Calculate the NPV using discount factors from both of the tables shown in Present Value Tables. Round the present value calculation and your final answer to the nearest whole dollar.

The NPV using the annuity tables is $.

Answer 1