Question
In: Accounting
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
- Expected annual revenues: $740,000
- Projected product life cycle: five years
- Equipment: $730,000 with a salvage value of $100,000 after five years
- Expected increase in working capital: $100,000 (recoverable at the end of five years)
- Annual cash operating expenses: estimated at $444,000
- Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.
| Year | Cash Flow |
| 0 | $ |
| 1–4 | $ |
| 5 | $ |
2.
Using the estimated annual cash flows, calculate the NPV.
$
3. What if revenues were overestimated by $148,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same. Enter cash outflows as negative amounts and cash inflows as positive amounts.
| Year | Cash Flow | Present Value |
| 0 | $ | $ |
| 1–4 | ||
| 5 | ||
| Net present value |
Solutions
Expert Solution
| Investment in Year-0 | |||||
| Investment in Equipment | -730000 | ||||
| Investment in WC | -100000 | ||||
| Investment in Year-0 | -830000 | ||||
| Annual cash inflows: | |||||
| Annual revenues expected | 740000 | ||||
| Less: Annual operating cost | 444000 | ||||
| Annual cash inflows: | 296000 | ||||
| Cash flows at Year-5 | |||||
| Salvage value of equipment | 100000 | ||||
| Release of Working capital | 100000 | ||||
| Cash flows at Year-5 | 200000 | ||||
| Req 1. | |||||
| Year | Cashflows | ||||
| 0Yr | -830000 | ||||
| 1-4 yrs | 296000 | ||||
| 5 yr | 496000 | ||||
| Req 2. | |||||
| Year | Cashflows | PVF at 8% | Present values | ||
| 0Yr | -830000 | 1 | -830000 | ||
| 1-4 yrs | 296000 | 3.31213 | 980390.5 | ||
| 5 yr | 496000 | 0.680583 | 337569.2 | ||
| NPV | 487960 | ||||
| Req 3. | |||||
| Annual cash inflows: | |||||
| Annual revenues expected | 592000 | (740000-148000) | |||
| Less: Annual operating cost | 444000 | ||||
| Annual cash inflows: | 148000 | ||||
| Year | Cashflows | PVF at 8% | Present values | ||
| 0Yr | -830000 | 1 | -830000 | ||
| 1-4 yrs | 148000 | 3.31213 | 490195.2 | ||
| 5 yr | 348000 | 0.680583 | 236842.9 | ||
| NPV | -102962 | ||||
ekkarill92 answered 2 years agoRelated Solutions
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $720,000
Projected product life cycle: five years
Equipment: $740,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $120,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $432,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $760,000
Projected product life cycle: five years
Equipment: $780,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $100,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $456,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $740,000
Projected product life cycle: five years
Equipment: $720,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $100,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $444,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value Carsen Sorensen, controller of Thayn Company,
just received the following data associated with production of a
new product: Expected annual revenues: $740,000 Projected product
life cycle: five years Equipment: $720,000 with a salvage value of
$100,000 after five years Expected increase in working capital:
$100,000 (recoverable at the end of five years) Annual cash
operating expenses: estimated at $444,000 Required rate of return:
8 percent The present value tables provided in Exhibit 19B.1 and
Exhibit 19B.2 must...
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a...
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $750,000
Projected product life cycle: five years
Equipment: $800,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $100,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $450,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must be used to...
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $128,700 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$36,000
$61,000
Year 2
22,000
47,000
Year 3
11,000
35,000
Year 4
(1,000)
24,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value
Method
The following data are
accumulated by Paxton Company in evaluating the purchase of $98,100
of equipment, having a four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$53,000
Year 2
19,000
41,000
Year 3
9,000
31,000
Year 4
(1,000)
21,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $153,200 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$44,000
$75,000
Year 2
27,000
58,000
Year 3
13,000
44,000
Year 4
(1,000)
29,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Reynolds Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Reynolds Company in
evaluating the purchase of $107,700 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$53,000
Year 2
19,000
41,000
Year 3
9,000
31,000
Year 4
(1,000)
21,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $129,200 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$38,000
$64,000
Year 2
23,000
49,000
Year 3
11,000
37,000
Year 4
(1,000)
25,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
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