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In: Finance
(NPV with varying required rates of return) Gubanich Sportswear is considering building a new factory to...
(NPV with varying required rates of return) Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $4,000,000 and would generate annual free cash inflows of $1,200,000 per year for 8 years. Calculate the project's NPV given: a. A required rate of return of 8 percent b. A required rate of return of 11 percent c. A required rate of return of 15 percent d. A required rate of return of 17 percent
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Expert Solution
a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=1,200,000[1-(1.08)^-8]/0.08
=1,200,000*5.746638944
=$6,895,966.73
NPV=Present value of inflows-Present value of outflows
=$6,895,966.73-$4,000,000
=$2,895,966.73(Approx).
b.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=1,200,000[1-(1.11)^-8]/0.11
=1,200,000*5.146122761
=$6,175,347.31
NPV=Present value of inflows-Present value of outflows
=$6,175,347.31-$4,000,000
=$2,175,347.31(Approx).
c.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=1,200,000[1-(1.15)^-8]/0.15
=1,200,000*4.487321508
=$5,384,785.81
NPV=Present value of inflows-Present value of outflows
=$5,384,785.81-$4,000,000
=$1,384,785.81(Approx).
d.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=1,200,000[1-(1.17)^-8]/0.17
=1,200,000*4.207162506
=$5,048,595.01
NPV=Present value of inflows-Present value of outflows
=$5,048,595.01-$4,000,000
=$1,048,595.01(Approx).
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