Question

Net Present Value Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

1. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,850,000 and will last 10 years.
2. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $40,000 per year. She estimates that the shop will have a useful life of 6 years.
3. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000.

Required:

1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.
$ _________

Should the company buy the new welding system?

Yes or No?

2. Conceptual Connection: Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.
$____________

Should she invest?
Yes or No?

What if the estimated return was $135,000 per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar.
$_________

The shop should now or should not be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated investment, returns or cash flow?

3. What was the required investment for Barker Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar.
$_______________

Answer 1

1. NPV= cash outflow - present value of cash inflow

=-1,850,000+(480000 ) * P/A(10years,12%)

=-1,850,000+480000*5.65022

= -1,850,000+2712105.6

NPV=862106$

YES company SHOULD buy the new welding system

2.NPV= cash outflow - present value of cash inflow

= - 180000 + 40000 * P/A (8%, 6 years)

=-180000+40000*4.62288

=4915$

YES as the NPV is positive the investment is worth doing.

new NPV

NPV= cash outflow - present value of cash inflow

= - 180000 + 135000 * P/A (8%, 6 years)

=-180000+135000*4.62288

=444089$

no it doesnot affect the decision its still yes.

as theNPV is positive.

3.

NPV = present value of cash inflow-cash outflow

63900 = 135000*P/A (8years,10%) - cash outflow

63900 = 135000*5.33493-cash outflow

cash outflow= 720216-63900

=656316$ is the required investment