Question

The owner of a number of gas stations is considering installing coffee machines in his gas...

The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $280,000 to install the coffee machines, and they are expected to boost cash flow by $120,000 per year for their five-year working life. What must the cost of capital be if the investment has a profitability index of 1.07?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Initial Investment = $280,000
Annual Cash Flow = $120,000
Working Life = 5 years

Profitability Index = Present Value of Cash Flows / Initial Investment
1.07 = Present Value of Cash Flows / $280,000
Present Value of Cash Flows = $299,600

Let Cost of Capital be i%

Present Value of Cash Flows = Annual Cash Flow * PVA of $1 (i%, n)
$299,600 = $120,000 * PVA of $1 (i%, 5)

Using financial calculator:
N = 5
PV = -299600
PMT = 120000
FV = 0

I = 28.72%

Cost of Capital = 28.72%

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
The owner of a number of gas stations is considering installing coffee machines in his gas...
The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $260,000 to install the coffee machines, and they are expected to boost cash flows by $111,425 per year for their five-year working life. what must the cost of capital be if this investment has a profitability index of 1?
Yusuf is considering installing a new energy-efficient lighting in his firm’s warehouse. The installation will cost...
Yusuf is considering installing a new energy-efficient lighting in his firm’s warehouse. The installation will cost $300,000, and he estimates total savings of $75,000 per year. The lights will depreciate evenly over five years, at which point they must be replaced. The cost of capital is 7% per year. What do the NPV and EVA rules indicate about whether Yusuf should install the lights?
The production manager of Baristas Ltd is considering to add 3 coffee machines to cater the...
The production manager of Baristas Ltd is considering to add 3 coffee machines to cater the demands of their signature coffee brew items. The cost of the coffee machine is €2,000 each. The supplier will charge a one-off installation cost of €100. The machines have a 5 year economic life with no salvage value. The machines will increase their annual revenues by €1000 with the total costs of operating the new machines of €350 annually. The production manager has a...
Suppose you operate a movie theater and are considering installing an arcade machine inside. The manufacturer...
Suppose you operate a movie theater and are considering installing an arcade machine inside. The manufacturer offers you the regular model costing $10,000 or a deluxe model costing $13,000. The regular model has an expected economic life of fifteen years and the deluxe model has an expected economic life of twenty years. Assuming the operating characteristics of the machines both meet your needs and have identical maintenance costs, which model should you choose to install in your movie theater from...
The management of Lefty Company is considering the purchase of one of two machines (investment projects)...
The management of Lefty Company is considering the purchase of one of two machines (investment projects) with related information given in the table below. The company’s cost of capital (required rate of return) is 10% Amount of Investment NPV of the investment Machine A $120,000 $12,000 Machine B $150,000 $13,500 Which one of the following statements is correct (true)? If the residual value used in the calculation of the NPV of Machine A was $5,000, but was then increased to...
16. Notational Inc. is considering installing a new server. The machine costs $100,000 and is expected...
16. Notational Inc. is considering installing a new server. The machine costs $100,000 and is expected to have a useful economic life of 8 years, after which it will have a book value of $0. In addition to the equipment costs, management expects installation costs of $10,000 and an initial outlay for net working capital of $12,000. The new server is expected to generate an additional $10,000 per year in earnings after tax over its useful life, but an additional...
Jasper Metals is considering installing a new molding machine is expected to produce operating cash flows...
Jasper Metals is considering installing a new molding machine is expected to produce operating cash flows of $58,000 per year for 7 years. At the beginning of the project, inventory will decrease by $18,400, accounts receivables will increase by $22,200, and accounts payable will increase by $15,900. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $258,000. The equipment...
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash...
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $60,000 per year for 7 years. At the beginning of the project, inventory will decrease by $20,000, accounts receivables will increase by $23,000, and accounts payable will increase by $16,500. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $264,000. The...
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash...
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $58,000 per year for 7 years. At the beginning of the project, inventory will decrease by $18,400, accounts receivables will increase by $22,200, and accounts payable will increase by $15,900. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $258,000. The...
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash...
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $61,000 per year for 7 years. At the beginning of the project, inventory will decrease by $20,800, accounts receivables will increase by $23,400, and accounts payable will increase by $16,800. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $267,000. The...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT