Question
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 $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).
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