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​(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 $6,000,000 and would generate annual free cash inflows of $1,000,000 per year for 6 years. Calculate the​ project's NPV ​given:

a. A required rate of return of 8 percent

b. A required rate of return of 10 percent

c. A required rate of return of 14 percent

d. A required rate of return of 17 percent

Solutions

Expert Solution

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1,000,000[1-(1.08)^-6]/0.08

=1,000,000*4.62287966

=$4622879.66

NPV=Present value of inflows-Present value of outflows

=4622879.66-6,000,000

=($1377120.34)(Approx)(Negative).

b.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1,000,000[1-(1.1)^-6]/0.1

=1,000,000*4.3552607

=$4355260.7

NPV=Present value of inflows-Present value of outflows

=4355260.7-6,000,000

=($1644739.3)(Approx)(Negative).

c.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1,000,000[1-(1.14)^-6]/0.14

=1,000,000*3.88866752

=$3888667.52

NPV=Present value of inflows-Present value of outflows

=3888667.52-6,000,000

=($2111332.48)(Approx)(Negative).

d.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1,000,000[1-(1.17)^-6]/0.17

=1,000,000*3.58918475

=$3589184.75

NPV=Present value of inflows-Present value of outflows

=3589184.75-6,000,000

=($2410815.25)(Approx)(Negative).

jeff jeffy answered 3 months ago
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