Question

Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash...

Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow:

Year Project I Project II
0 $(100,000) $(100,000)
1 —           63,857
2   134,560     63,857

Skiba's cost of capital is 8%.

Required: 1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent.

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
Calculation of net present value
year pv factor present value
0 -100000 1 -100000
2 134560 0.85734 115364
net present value = present value of cash inflow-outflow
net present value = 115364-100000 = 15364
IRR
initial investment = cash inflow at the end yr2*pvf(i%,2yr)
100000 = 134560*pvf(i%,2 yrs)
Pvf(i%,2yrs) = 100000/134560 = 0.74316
IRR = 16%
Project II
year Pvf present value
0 -100000 1 -100000
1-2 63857 1.78326 113874
Net present value = 113874-100000 = 13874
IRR
100000 = 63857*pvaf(i%,2yrs)
pvaf (i%,2yr) = 100000/63857
pvaf (i%,2yr) = 1.5660
IRR = 18%
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Net Present Value Versus Internal Rate of Return For discount factors use Exhibit 12B-1 and Exhibit...
Net Present Value Versus Internal Rate of Return For discount factors use Exhibit 12B-1 and Exhibit 12B-2. Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow: Year Project I Project II 0 $(100,000) $(100,000) 1 —           63,857 2   134,560     63,857 Skiba's cost of capital is 12%. Required: 1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers...
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows....
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,250,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $50,000 per year. She estimates that...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,500 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation. 1. Calculate project NPV for each company. (Do not...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,200 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation. a. Calculate project NPV for each company. (Do not...
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows....
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. 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. 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...
NPV Your division is considering two investment projects, each of which requires an up-front expenditure of...
NPV Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $  4,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $   Project B: $   What are the...
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax...
A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: 0 1 2 3 4 5 Project M -$9,000 $3,000 $3,000 $3,000 $3,000 $3,000 Project N -$27,000 $8,400 $8,400 $8,400 $8,400 $8,400 Calculate NPV for each project. Do not round intermediate calculations. Round your answers to the nearest cent. Project M:    $   Project N:    $   Calculate IRR for each project. Do not round intermediate calculations. Round your answers to...
Your division is considering two investment projects, each of which requires an up-front expenditure of $15...
Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $  5,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $    Project B: $    What are the two...
7. Your division is considering two investment projects, each of which requires an up-front expenditure of...
7. Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $ 4,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $__ Project B: $__ What are...
Discount Rates, Quality, Market Share, Contemporary Manufacturing Environment Sweeney Manufacturing has a plant where the equipment...
Discount Rates, Quality, Market Share, Contemporary Manufacturing Environment Sweeney Manufacturing has a plant where the equipment is essentially worn out. The equipment must be replaced, and Sweeney is considering two competing investment alternatives. The first alternative would replace the worn-out equipment with traditional production equipment; the second alternative uses contemporary technology and has computer-aided design and manufacturing capabilities. The investment and after-tax operating cash flows for each alternative are as follows: Year Traditional Equipment Contemporary Technology    0 $(1,000,000) $(4,000,000)    1...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT