Suppose that an existing machine generates a monthly cash flow of $150,000. An investment of $6,000,000...

Suppose that an existing machine generates a monthly cash flow
of $150,000. An investment of $6,000,000 will increase the cash
flow to $200,000 per month. The relevant monthly discount rate is1%. Should you invest?
• Let’s use the incremental method:
                        Period 0.                   Periods 1…
• Project 1.     0.                                 150,000
• Project 2.     -6,000,000                  200,000
Diff 2-1.          -6,000,000.                   50,000

Incremental NPV = -6000000+ 50000/0.01= -$1,000,000

how come incremental NPV uses 1% rather than (1+r)

Expert Solution

As the cash flows are perpetual i.e., permanent or continue indefinitely

We have to use the formula for present value of perpetuity=monthly cash flows/monthly discount rate

Hence, it is 1% or 0.01 and not 1+1% or 1.01

jeff jeffy answered 2 years ago

Year Cash flow (€) 0 - Investment -? 1 150,000 2 150,000 3 4 150,000 ?...

Year Cash flow (€) 0 - Investment -? 1 150,000 2 150,000 3 4 150,000 ? Some years ago X AG paid €15’000 for a vacant lot with planning permission. The plot could easily be sold today for 10 times that amount. X AG has however a project in mind that would occupy the plot and require investment of €200,000 but generate positive cash flows of €150,000 for the next 4 years. X AG will be able to sell the...

1) A project costs $150,000 and generates a cash flow of $75000 in year 1,$25000 in...

1) A project costs $150,000 and generates a cash flow of $75000 in year 1,$25000 in year 2 and then $10000 in year 3 through 10. What is the payback of the project? a) 5 years b) 6 years c) 8 years d) 7 years 2) A project requires an initial outflow of $100,000 and is expected to produce $20000 inflows over each of the next ten years. If the required return of the project is 8%, what is its...

Nexus Company is considering an investment project that generates a cash flow of $1,800 next year...

Nexus Company is considering an investment project that generates a cash flow of $1,800 next year if the economy is favorable but generates only $700 if the economy is unfavorable. The probability of favorable economy taking place is 50% and unfavorable economy is 50%. The project will last only one year and be closed after that. The cost of investment is $1,200 and Nexus plans to finance the project with $400 of equity and $800 of debt. Assuming the discount...

Wrigley Company is considering an investment project that generates a cash flow of $13,000 next year...

Wrigley Company is considering an investment project that generates a cash flow of $13,000 next year if the economy is favorable but generates only $6,000 if the economy is unfavorable. The probability of favorable economy is 70% and of unfavorable economy is 30%. The project will last only one year and be closed after that. The cost of investment is $10,000 and Star Ventures plans to finance the project with $2,000 of equity and $8,000 of debt. Assuming the discount...

6) A cash flow involves an initial investment of $1, 000 and then generates $70 revenue...

6) A cash flow involves an initial investment of $1, 000 and then generates $70 revenue at the end of each year, starting one year after the initial $1, 000 investment. Find the payback period and discounted payback period (the latter at an effective annual rate of 4%.)

1. Suppose that a company has a Free Cash Flow of $150,000 in one year, $200,000...

1. Suppose that a company has a Free Cash Flow of $150,000 in one year, $200,000 in 2 years and then FCFs start growing at a constant rate of 5%. The WACC used as a discount rate for FCFs is 8%. The company has $ 18,000 in long-term debt and it has 40,000 shares outstanding. Find current stock price using FCF model. 2. Let's take a look at a different company. Free cash flows are usually volatile when a company...

annual cash flow, -500,000 125,000 150,000 175,000 200,000 250,000 What is the IRR of the investment

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow...

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow from financing activities. What is the relative importance of each, and what factors impact your assessment? Does it vary by industry or business maturity? Imagine that you were structuring a business from the ground up--what percentage of cash flow would you target for each of these three types?

Suppose a company had an initial investment of $40,000. The cash flow for the next five...

Suppose a company had an initial investment of $40,000. The cash flow for the next five years are $17,000, $19,000, $20,000, $20,000, and $14,000, respectively. The interest rate is 11%. Enter your answers rounded to 2 DECIMAL PLACES. #1What is the discounted payback period? #2If the firm accepts projects with discounted payback periods of less than 3 years, will the project be accepted? Yes No #3What is the NPV of the project?

Suppose you are considering an investment that will generate equal annual cash flow of $200,000 over...

Suppose you are considering an investment that will generate equal annual cash flow of $200,000 over its 10-year life, resulting in an IRR of 14% and a Profitability index of 1.05. What is this investment's NVP?

Question