Question

In: Accounting

The manager of Keebee, Inc. is considering a new project that would require an initial investment...

The manager of Keebee, Inc. is considering a new project that would require an initial investment of $1,197,810.  The cost of capital or the required rate of return of this company is 10 percent.  This project will generate an annual cash inflow of $300,000 in the following five years.  

  1. Calculate the net present value (NPV) of this project.  Indicate whether or not this project is acceptable.
  1. Calculate the internal rate of return (IRR) of this project.

Solutions

Expert Solution

Computaton of Net Present Value (NPV):

Initial cash outlay      (a)                                   1197810

Present value of cash inflows (b)

(300000 X cumulative discount factor 3.790)         1137000

                                                                          -------------------

NPV (b-a)                                                                  - 60810

                                                                        ===============

Ths project should not be accepted as the NPV is negatve.

Computaton of Internal Rate of Return (IRR):

To arrive at IRR, we need to compute NPV at a different rate randomly, say 6%.

Initial cash outlay      (a)                                   1197810

Present value of cash inflows (b)

(300000 X cumulative discount factor 4.210)         1263000

                                                                          -------------------

NPV (b-a)                                                                   65190

                                                                        ===============

IRR = LR + [(NPV at LR/NPV at LR-NPV at HR) X (HR-LR)]

Where LR = lower rate and HR = higher rate, here LR = 6% and HR = 10%

             = 6 + (65190/65190+60810) X 4

             = 6 + 2.06

         IRR = 8.06 %

================


Related Solutions

Cooper Industries is considering a project that would require an initial investment of $101,000. The project...
Cooper Industries is considering a project that would require an initial investment of $101,000. The project would result in cost savings of $62,000 in year 1 and $70,000 in year two. What is the internal rate of return?
Kuhn Corporation is considering a new project that will require an initial investment of $4,000,000. It...
Kuhn Corporation is considering a new project that will require an initial investment of $4,000,000. It has a target capital structure consisting of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Kuhn Co. is considering a new project that will require an initial investment of $4 million....
Kuhn Co. is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Kuhn Co. is considering a new project that will require an initial investment of $45 million....
Kuhn Co. is considering a new project that will require an initial investment of $45 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Kuhn Co. is considering a new project that will require an initial investment of $4 million....
Kuhn Co. is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Kuhn Co. is considering a new project that will require an initial investment of $4 million....
Kuhn Co. is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1555.38. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Kuhn Co. is considering a new project that will require an initial investment of $20 million....
Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000.
   Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years. At the end of the project, equipment that had been used in the project could be sold for $32,000. The company's discount rate is 14%.  (Note: For accuracy, use the appropriate discount factor(s) using Exhibits 13B-1 and 13B-2)  The net present value of the...
A company is considering an investment in a new project which would require $39,000 worth of...
A company is considering an investment in a new project which would require $39,000 worth of capital expenditures and an increase of $45,000 in net working capital that will be recovered at the end of the project. Each year, starting at the end of the first year, the operating cash flows of the project will be $32,000 for 3 years. The project is so risky and so crazy its WACC is 16%. What is the net present value of the...
What is the NPV of project A? The project would require an initial investment in equipment...
What is the NPV of project A? The project would require an initial investment in equipment of 60,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). Annual operating cash flows of 18,600 dollars per year are expected each year until the project ends in...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT