Question

2. Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $815,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? Round to two decimal places.

3.

An investment of $83 generates after-tax cash flows of $38.00 in Year 1, $66.00 in Year 2, and $127.00 in Year 3. The required rate of return is 20 percent. The net present value is

Round to two decimal places.

4. McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $817,500, and $1,245,000 over the next three years. What is the payback period for this project? Round to four decimal places.

5.

Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project?

Year Project

0 ($11,368,000)

1 $ 2,157,589

2 $ 3,787,552

3 $  3,200,650

4 $ 4,115,899

5 $ 4,556,424

Round to two decimal places.

Answer 1

2. Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $815,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? Round to two decimal places.

	Cash Flow	Present Value of 1 at 15%	Present Value
Year 1	$                    815,322	0.8696	$              709,004.01
Year 2	$                    863,275	0.7561	$              652,722.23
Year 3	$                    937,250	0.6575	$              616,241.88
Year 4	$                  1,017,112	0.5718	$              581,584.64
Year 5	$                  1,212,960	0.4972	$              603,083.71
Year 6	$                  1,225,000	0.4323	$              529,567.50
Totals	$                  6,070,919		$            3,692,203.97
Amount invested			$          (4,133,250.00)
Net present value			$            (441,046.03)

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3. An investment of $83 generates after-tax cash flows of $38.00 in Year 1, $66.00 in Year 2, and $127.00 in Year 3. The required rate of return is 20 percent. The net present value is (Round to two decimal places)

	Cash Flow	Present Value of 1 at 20%	Present Value
Year 1	$                                38	0.8333	$                          31.67
Year 2	$                                66	0.6944	$                          45.83
Year 3	$                              127	0.5787	$                          73.49
Totals	$                              231		$                        150.99
Amount invested			$                        (83.00)
Net present value			$                          67.99

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4. McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $817,500, and $1,245,000 over the next three years. What is the payback period for this project? Round to four decimal places.

• Initial Investment: $1,850,000

Year	Annual Cash Inflows	Cumulative Cash Inflows
1	$                      525,000	$                               525,000
2	$                      817,500	$                             1,342,500
3	$                   1,245,000	$                             2,587,500

• From the above table it is clear that payback period lies between Year 2 and Year 3.
• Upto year 2, a sum of $1,342,500 will be recovered, remaining $507,500 (i.e. $1,850,000 - $1,342,500) will have to be recovered in part of Year 3.
• Computation:
  • $507,500 ÷ $1,245,000 = 0.4076
  • Therefore, payback period = 2 + 0.4076 = 2.4076 years

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5. Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project?

Year Project

0 ($11,368,000)

1 $ 2,157,589

2 $ 3,787,552

3 $  3,200,650

4 $ 4,115,899

5 $ 4,556,424

Round to two decimal places.

	Cash Flow	Present Value of 1 at 13.8%	Present Value
Year 1	$                  2,157,589	0.8787	$            1,895,873.45
Year 2	$                  3,787,552	0.7722	$            2,924,747.65
Year 3	$                  3,200,650	0.6785	$            2,171,641.03
Year 4	$                  4,115,899	0.5963	$            2,454,310.57
Year 5	$                  4,556,424	0.5239	$            2,387,110.53
Totals	$              17,818,114		$        11,833,683.24
Amount invested			$      (11,368,000.00)
Net present value			$              465,683.24

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Notes:

• Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of an investment project.
• NPV is used to evaluate investment projects in capital budgeting.
• A project with a positive NPV is accepted. A positive NPV indicates that the project will result in net cash inflows in today's dollars.
• A project with a negative NPV is rejected. A negative NPV indicates that the project will result in net cash outflows in today's dollars.
• The cash flows are discounted at a required rate of return. It may be a weighted average cost of capital, cost of debt, etc.
• The payback period of an investment is the time required for the cumulative total net cash inflows from the investment to equal the initial outlay. At that point of time, the investor would have recovered his investment in the project