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.

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

Answer 3:

NPV = $63,900

Life of the project = 8 years

Annual after tax cash flow = $135,000

Required rate of return = 10%

We will first calculate PV of annual cash flows:

PV Factor for a One-Dollar Annuity Discounted at k% for n Periods = [1 - 1/ (1 + k) ⁿ] / k

PV of cash flow = 135000 * (1 - 1/ (1 + 10%) ⁸) / 10%

= $720,215.04

NPV = PV of cash flows - Required investment

Hence:

Required investment = PV of cash flows - NPV = 720215.04 - 63900 = $656315.04

Required investment = $656,315