Question

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 .

Answer 1

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