Question

Scenario: A new product manager presents to you, the Chief Financial Officer, a proposal to expand...

Scenario: A new product manager presents to you, the Chief Financial Officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $20,000 by the end of year 4, will bring both praise and approval. You explain the company uses a 12% discount rate for cash flows and project related budgeting. You take the time to present the details of the Net Present Value (NPV) model used to assess product proposals. The data is below.

Project Outflows to Buy Machine      

Day 1 Cash Out                     -$70,000 12% discount rate applied.

End Year 1 Cash Repayment            $10,000

End Year 2 Cash Repayment            $20,000

End Year 3 Cash Repayment            $30,000

End Year 4 Cash Repayment            $30,000

To educate the new manager, and as CFO, you take the time to evaluate the following:

  • Assess the investment option when a 7% cost of capital discount rate, versus a 12% cost of capital discount rate is applied. Include values in your assessment. Provide the NPV at a 7% cost of capital discount rate.

Homework Answers

Answer #1

At 7%:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=10,000/1.07+20,000/1.07^2+30,000/1.07^3+30,000/1.07^4

=$74190.36(Approx)

NPV=Present value of inflows-Present value of outflows  

=74190.36-70,000

=$4190.36(Approx)

Hence since NPV is positive;project must be accepted

At 12%:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=10,000/1.12+20,000/1.12^2+30,000/1.12^3+30,000/1.12^4

=$65291.4(Approx)

NPV=Present value of inflows-Present value of outflows  

=65291.4-70,000

=$-4708.6(Approx)(Negative)

Hence since NPV is negative;project must be rejected.

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
Scenario: A new product manager presents to you, the Chief Financial Officer, a proposal to expand...
Scenario: A new product manager presents to you, the Chief Financial Officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $20,000 by the end of year 4, will bring both praise and approval. You explain the company uses a 12% discount rate for cash flows and project related budgeting. You take the time to present the details of the...
Cobra Golf Co.is considering a proposal to replace an existing casting machine for producing a new...
Cobra Golf Co.is considering a proposal to replace an existing casting machine for producing a new line of low quality golf clubs. The machine is expected to have a four-year useful life and will be depreciated according to 3-year MACRS (.25, .38, .37). The machine will cost the company $100,000 plus freight and installation costs of $20,000. The machine will be fully depreciated and will have an ending market value of $30,000. Expanding the product line will increase inventories by...
Revenues generated by New Link product are forecast as follows: year 1: $40,000, year 2: $30,000,...
Revenues generated by New Link product are forecast as follows: year 1: $40,000, year 2: $30,000, year 3: $20,000, year 4: $10,000. Expenses are expected to be 40% of revenues and working capital required in each year is expected to be 20% of revenues for the following year. The product requires an immediate investment of $45,000 in plant and equipment a. What is the initial investment in the product? Remember working capital b. If the plant and equipment are depreciated...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $40,000 2...
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $40,000 2 30,000 3 20,000 4 10,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $53,000 in plant and equipment. Required: a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment...
) You are considering bidding on a project to make new cases for mobile phones. The...
) You are considering bidding on a project to make new cases for mobile phones. The project details include: Upfront costs of $350,000 for a new injection-moulding machine. 4 year life $30,000 in yearly pre-tax operating costs Initial investment of $50,000 in working capital Your company has a tax rate of 30% Complete the following table and calculate the net present value for the project costs. Year Cash Flows PV 0 1 2 3 4 NPV Your company's required rate...
Perini is considering a new investment. Financial projections for the investment are tabulated here. The corporate...
Perini is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 25 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Suppose the appropriate discount rate is 14 percent. Determine the net working capital spending for Year 4 then...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to new product development projects. b. Sensitivity analysis only applies to new product development projects c. Sensitivity analysis involves changing one project variable at a time while scenario analysis involves changing more than one project variable at the same time d. Sensitivity analysis only applies when projects are mutually exclusive. 3. Which of the following statements is true regarding the internal rate of return (IRR)?...
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount...
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both projects is 12 percent. Project A: Nagano NP-30 Professional clubs that will take an initial investment of $940,000 at Time 0. Introduction of new product at Year 6 will terminate further cash flows from this project. Project B: Nagano NX-20 High-end amateur clubs that will take an initial investment of $650,000 at Time 0. Introduction of new product at Year 6...
Orion Corp. is evaluating a proposal for a new project. It will cost $50,000 to get...
Orion Corp. is evaluating a proposal for a new project. It will cost $50,000 to get the undertaking started. The project will then generate cash inflows of $20,000 in its first year and $16,000 per year in the next five years, after which it will end. Orion uses an interest rate of 15% compounded annually for such evaluations. 1. Calculate the "Net Present Value" (NPV) of the project by treating the initial cost as a cash out-flow (a negative) in...
A financial manager is considering a proposal from the Chief Operating Officer (COO) to purchase precision...
A financial manager is considering a proposal from the Chief Operating Officer (COO) to purchase precision testing equipment. The financial manager with the assistance of operations has estimated the cash flow benefits, namely the cost savings from fewer production defects, of the new equipment. The Present Value (PV) of the these positive cost savings over the next 10 years is estimated to be $755,000 based on the firm's cost of capital of 8%. Which of the following statements is true?...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT