Question

In: Finance

NPV and maximum return: A firm can purchase new equipment for a ​$21,000 initial investment. The...

NPV and maximum return: A firm can purchase new equipment for a ​$21,000 initial investment. The equipment generates an annual​ after-tax cash inflow of $8,000 for 55 years.

a. Determine the net present value (NPV​) of the​ asset, assuming that the firm has a cost of capital of 12​%. Is the project​ acceptable?

b. Determine the maximum required rate of return that the firm can have and still accept the asset.

Please show and explain work!

Solutions

Expert Solution

Net Present Value(NPV)= Present value of cash inflows - Present value of cash outflows

The decision Criterion for Accept/Reject :

NPV>0 Accept the proposal

NPV<0 Reject the proposal

NPV=0 Accept/Reject the proposal i.e Indifferent point.

Step 1: Calculation of the present value of cash inflows

Annual cash flows after tax = $ 8000

Present value annuity factor PVAF (12%, 55 years) = 8.317 (For calculation see: Image attached)

The present value of cash inflows = Annual cash inflows after tax*PVAF (12%, 55 years)

= $ 8000*8.317

= $ 66536

Step 2: Present value of cash out flows = $ 21000

Step 3: NPV = Present value of cash inflows - Present value of cash outflows

NPV = $ 66536 - $ 21000

NPV = $ 45536

Decision: Since NPV is > 0 accept the proposal.

2. Calculation of maximum rate of return i.e, Internal rate of return (IRR)

jeff jeffy answered 8 months ago
Next > < Previous

Related Solutions

NPV and maximum return   A firm can purchase new equipment for a $20,500 initial investment. The...
NPV and maximum return   A firm can purchase new equipment for a $20,500 initial investment. The equipment generates an annual​ after-tax cash inflow of $5,000 for 7 years. a. Determine the net present value (NPV​) of the​ asset, assuming that the firm has a cost of capital of 11​%. Is the project​ acceptable? b. Determine the maximum required rate of return that the firm can have and still accept the asset.
A firm can purchase new equipment for a ​$150,000 initial investment.
NPV and maximum return    A firm can purchase new equipment for a ​$150,000 initial investment. The equipment generates an annual​ after-tax cash inflow of ​$44,400 for 4 years. a. Determine the net present value ​ (NPV​) of the​ asset, assuming that the firm has a cost of capital of 10​%. Is the project​ acceptable? b. Determine the maximum required rate of return that the firm can have and still accept the asset.
Firm A is considering the purchase of copying equipment that will require an initial investment of$15,000...
Firm A is considering the purchase of copying equipment that will require an initial investment of$15,000 and $4,000 per year in annual operating costs over the equipment’s estimated useful life of 5 years. The company will use a discount rate of 8.5%. What is the equivalent annual cost?
A firm is evaluating the purchase of new machinery that requires an initial investment of $10,000....
A firm is evaluating the purchase of new machinery that requires an initial investment of $10,000. The cash flows that will result from this investment are presently valued at $11,500. The net present value of the investment is: A. $0 B. –$1,500 C. $1,500 D. $10,000 E. $11,500 Armstrong Bolts, Inc. is considering the purchase of a new machine that will cost $69.500 with installation. If Armstrong expects the cash inflows to zero in the first year and then $21,500...
A firm is considering a project that requires an initial investment of $300,000 in new equipment,...
A firm is considering a project that requires an initial investment of $300,000 in new equipment, which has a five-year life and a CCA rate of 30 percent. An initial investment in raw materials inventory of $50,000 is also required to support the project, which will rise to 15 percent of sales. The project will generate sales revenue of $400,000 in the first year, which will grow at 4 percent per year. Variable costs will be $220,000 for the first...
A firm is thinking about launching a new product. The initial investment in equipment is $600,000....
A firm is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000. The investment in the net working capital will be $40,000 at the beginning of the project; 40% of this will be recovered at the end of year 4, and the rest at the end of year...
23. A firm is thinking about launching a new product. The initial investment in equipment is...
23. A firm is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000. The investment in the net working capital will be $40,000 at the beginning of the project; 40% of this will be recovered at the end of year 4, and the rest at the end of...
A firm is thinking about launching a new product. The initial investment in equipment is $600,000....
A firm is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000. The investment in the net working capital will be $40,000 at the beginning of the project; 40% of this will be recovered at the end of year 4, and the rest at the end of year...
A firm is thinking about launching a new product. The initial investment in equipment is $600,000....
A firm is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000. The investment in the net working capital will be $40,000 at the beginning of the project; 40% of this will be recovered at the end of year 4, and the rest at the end of year...
A firm is thinking about launching a new product. The initial investment in equipment is $600,000....
A firm is thinking about launching a new product. The initial investment in equipment is $600,000. The project has an estimated life of five years. The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000. The investment in the net working capital will be $40,000 at the beginning of the project; 40% of this will be recovered at the end of year 4, and the rest at the end of year...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT