Question

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 $2,350,000 and will last 10 years.
2. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $330,000. She estimates that the return from owning her own shop will be $45,000 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.

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.

Answer 1

IF return was $135000 , NPV is positive she should invest in the shop , if the NPV is positive and above 0 you are past breakeve point i.e. you are covering your costs and business brings in profit , so the NPV if we keep aside other factors if positive helps making a decision to invest or not to invest.

at a return of $45000 you should not invest at $135000 you should invest

Ques 2
	Time	Amount	PV @ 8%	amount
cash outflows
cost of investment	0	330000	1	330000
cash inflows
return	1-6 years	135000	4.62288	624089
NPV=Inflows-outflows				294089
NPV is positive she should invest