Question

Net Present Value

Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present value of an annuity of $1, which is the amount to be multiplied times the future annual cash flow amount.

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

1. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,350,000 and will last 10 years.
2. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $230,000. She estimates that the return from owning her own shop will be $50,000 per year. She estimates that the shop will have a useful life of 6 years.
3. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000.

Required:

1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.
$

Should the company buy the new welding system? YES/NO

2. Conceptual Connection: Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.
$

Should she invest? YES/NO

What if the estimated return was $135,000 per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar.
$

The shop (SHOULD/SHOULD NOT) be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated (INVESTMENT/RETURNS/CASHFLOW)

3. What was the required investment for Barker Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar.
$

Answer 1

Answer:-

1.

Net present Value

1162106

Working:

Campbell Manufacturing
Years	0	1-10
Initial investment	-1550000
Annual cash flows		480000
Rate of discount	12%	12%
Present Value factor	1	5.65022
Present Value	-1550000	2712106
Net present Value	1162106

2.

Net present Value

-98856

Working:

Evee cardenas
Years	0	1-6
Initial investment	-330000
Annual cash flows		50000
Rate of discount	8%	8%
PV factor	1	4.62288
Present Value	-330000	231144
Net present Value	-98856

3.

Required Investment

784116

Working:

Annual after tax cash flows	135000
Rate of discount	10%
Life of the project - years	8
Present value of annuatiy of $1	5.33493
for eight years @10% p.a
Present value of the cash flows	720216
NPV of the project	63900
Initial investment (720,216+63,900)	784116

if you have any query please ask me in comment box i am here to helps you don't give direct Thumbs down.if you satisfied my work give Thumbs UP

*******THANK YOU*******