Question

NPV and IRR Each of the following scenarios is independent. All cash flows are after-tax cash...

NPV and IRR

Each of the following scenarios is independent. All cash flows are after-tax cash flows.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be $854,000 per year. The system costs $4,559,000 and will last ten years. Compute the NPV assuming a discount rate of 12 percent.
$

Should the company buy the new system?

2. Sterling Wetzel has just invested $224,500 in a restaurant specializing in German food. He expects to receive $34,565 per year for the next eleven years. His cost of capital is 9.45 percent. Compute the internal rate of return. Round your answers to whole percentage value (for example, 16% should be entered as "16" in the answer box).
%

Did Sterling make a good decision?

Homework Answers

Answer #1

1).

NPV can be calculated using the formula C0+C1/(1+r)+C2/(1+r)^2+....Cn/(1+r)^n, shere C0 is initial investment, Cn are cash inflows, r is required rate of return and n is the number of periods.

So, -4559000+854000/(1.12)+854000/1.12^2+....854000/1.12^10= -4559000+854000)1.12+854000/1.2544+...854000/3.1058= 266290.47

As the NPV is positive, company should buy the system.

2).

IRR is the interest rate at which NPV is 0.

So, from the given data, -224500+34565/(1+r)+34565/(1+r)^2+....34565/(1+r)^11= 0. On solving, we get IRR=10%

As IRR is greater than his cost of capital of 9.45%, Sterling made a good decision.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
NPV and IRR Each of the following scenarios is independent. All cash flows are after-tax cash...
NPV and IRR Each of the following scenarios is independent. All cash flows are after-tax cash flows. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be $895,000 per year. The system costs $4,104,000 and will last six years. Compute the NPV assuming a discount rate of 6 percent. $ Should the company...
NPV and IRR Each of the following scenarios is independent. All cash flows are after-tax cash...
NPV and IRR Each of the following scenarios is independent. All cash flows are after-tax cash flows. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be $787,000 per year. The system costs $4,697,000 and will last nine years. Compute the NPV assuming a discount rate of 8 percent. $ Should the company...
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...
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...
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...
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1....
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Brad Blaylock has purchased a tractor for $90,000. He expects to receive a net cash flow of $32,500 per year from the investment. What is the payback period for Jim? Round your answer to two decimal places. _____years 2. Bertha Lafferty invested $382,500 in a laundromat. The facility has a 10-year life expectancy with no expected salvage value. The laundromat will produce a net...
Internal Rate of Return Manzer Enterprises is considering two independent investments: A new automated materials handling...
Internal Rate of Return Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs $900,000 and will produce net cash inflows of $300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs $775,000 and will produce labor savings of $400,000 and $500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. The present value tables provided...
Payback Period Each of the following scenarios is independent. Assume that all cash flows are after-tax...
Payback Period Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Colby Hepworth has just invested $500,000 in a book and video store. She expects to receive a cash income of $120,000 per year from the investment. Kylie Sorensen has just invested $1,620,000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: $350,000, $490,000, $810,000, $500,000, and $310,000. Carsen Nabors invested in a project...
Given the following cash flows for a capital project, calculate the NPV and IRR. The required...
Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. Year 0 1 2 3 4 5 Cash Flows $-37004 $11550 $12750 $16800 $10700 $5350 NPV=4947. IRR=18.0% NPV=4947. IRR=9.9% NPV=9464. IRR=9.9% NPV=9464. IRR=18.0%
NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas...
NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of 15 percent. YEAR DEEPWATER FISHING NEW SUBMARINE RIDE 0 −$835,000 −$1,650,000 1 450,000 1,050,000 2 410,000 675,000 3 335,000 520,000 As a financial analyst for the company, you are asked the following questions. If your decision rule is to accept the project with the greater IRR, which project should you choose? Since you are fully...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT