Question

# Snow Inc. has just completed development of a new cell phone. The new product is expected...

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 decrease 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: 1. Prepare a schedule of the projected annual cash flows. 2. Calculate the NPV using only discount factors from the Present Value of a Single Amount table shown in Present Value Tables. 3. Calculate the NPV using discount factors from both of the tables shown in Present Value Tables.
 Amount Descriptions Equipment Operating expenses Recovery of working capital Revenues Salvage Total Working capital

Use Present Value of a Single Amount and Present Value of an Annuity tables. Use them as directed in the problem requirements.

1. Prepare a schedule of the projected annual cash flows. Refer to the list of Amount Descriptions for the exact wording of text items within your schedule. If an amount is negative or an outflow, first enter a minus sign (-).

 Snow Inc. Projected Annual Cash Flows
 1 Year 0 2 3 4 5 Years 1-4 6 7 8 9 Year 5 10 11 12 13 14

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 .

preparation schedule of annual projected cash flows and calculating NPV of the cash flows using PVF

 Particulars inflows PVIF/PVIFA NPV outflows PVIF/PVIFA NPV NET PROFIT Initial Investment(year1 ) 1500000 1 1500000 Annual cash revenue( years 1-5) 1400000 3.992710037 5589794.052 Salvage value (5th year) 180000 0.680583197 122504.9755 total working cap decrease(for 5 years) 200000 3.992710037 798542.0074 Annual operating exp( years 1-5) 820000 3.992710037 3274022.23 6510841.035 4774022.23 17368

Calculation of PVF

 PVIF Disc Rate 8% YEAR PV 1 0.925925926 2 0.85733882 3 0.793832241 4 0.735029853 5 0.680583197 PVIFA 3.992710037 To calc PVIF 1/1*(1+8%)^N N= No. of years