Question

**Manager of a computer company plans to spend on new
hardware $1.0 million in the first year with amounts decreasing by
$0.6 million each year thereafter. Income of the company is
expected to be $6.0 million the first year increasing by $0.4
million each year thereafter. Determine the annual worth over the
years 1 through 5 of the companies net cash flow at annual interest
rate of 10%.**

Answer #1

Working notes:

- Net cash flow = Annual income - Annual cost
- Annual income, year N = Annual income, year (N - 1) + $0.4 million
- Annual cost, year N = Annual cost, year (N - 1) - $0.4 million

First, we compute Present worth of net cash flows as follows.
Note that PV Factor in year N = (1.10)^{-N}.

Year | Income ($M) | Cost ($) | Net cash flow ($M) | PV factor @10% | Discounted Net cash flow ($M) |

1 | 6 | 1 | 5.00 | 0.9091 | 4.55 |

2 | 6.4 | 0.4 | 6.00 | 0.8264 | 4.96 |

3 | 6.8 | -0.2 | 7.00 | 0.7513 | 5.26 |

4 | 7.2 | -0.8 | 8.00 | 0.6830 | 5.46 |

5 | 7.6 | -1.4 | 9.00 | 0.6209 | 5.59 |

PW of NCF ($M) = | 25.82 |

Annual worth = Present worth / P/A(10%, 5) = $25.82 million /
3.7908** = **$6.81 million**

**From P/A factor table

The manager of a division that produces computer hardware is
considering the opportunity to invest in two independent projects.
The first is a monitor and the second is a CPU. Without the
investments, the division will have total assets for the coming
year of $14.5 million and after-tax income of $1.58 million. The
invested capital required for each investment and the expected
operating incomes are as follows:
Monitor CPU
After-tax operating
income
$33,750
$44,850
Invested
capital
375,000
345,000
Corporate...

1-Company expects revenue of $1 million in year 1, $1.2 million
in year 2, and amounts increasing by $200,000 per year thereafter.
If the company’s MARR is 5% per year, what is the future worth of
the revenue through the end of year 10?

Two options have been provided by the mechanical engineer to the
manager to improve the productivity of the factory. These options
are expected to reduce manual tasks by installing new automated
machines.
Option1: the first cost is $12,500. The expected annual savings
for the first year is $5,000 and it will decrease by $600 for each
year thereafter.
Option 2: the initial cost is $9,500. The expected annual
savings for the first year is $3,600 and it will decrease by...

Your firm plans to buy another company for $100 million. The
acquisition is expected to generate net benefit of $20 million per
year (at year-end) over 3 years and then $25 million indefinitely
(perpetually). If your firm’s cost of capital is 12%, what is the
NPV of the proposal and is it worth it?

A new company, Jono's Lifeline, plans to start paying dividends
in 5 years time. This first dividend will be $0.90 and thereafter
the dividends will increase by 4% each year indefinitely. If the
required return is 14%, what is the price of a share today?

Your company is planning to spend $50,000 on a machine to
produce a new computer game. Shipping and installation costs of the
machine will be $2,500. The machine has an expected life of 6
years, a $29,000 estimated resale value, and falls under the MACRS
5-Year class life. Revenue from the new game is expected to be
$39,000 per year, with costs of $13,000 per year. The firm has a
tax rate of 30 percent, an opportunity cost of capital...

Suppose you are the financial manager of a company, and there
are three potential projects for investment. The risk free rate is
2%. The market risk premium is 6%. The beta of the company is
0.6.
You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.
You need to invest $105 today for Project B, and project B is...

Suppose you are the financial manager of a company, and there
are three potential projects for investment. The risk free rate is
2%. The market risk premium is 6%. The beta of the company is
0.6.
You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.
You need to invest $105 today for Project B, and project B is...

Suppose you are the financial manager of a company, and there
are three potential projects for investment. The risk free rate is
2%. The market risk premium is 6%. The beta of the company is
0.6.
You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.
You need to invest $105 today for Project B, and project B is...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 8 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 12 minutes ago

asked 17 minutes ago

asked 41 minutes ago

asked 44 minutes ago

asked 49 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago