Question

For each of the following problems consider an investment in a subsidiary for a corporation  The purchase of the subsidiary has an anticipated life of 20 years, and should bring your company additional profit of $50,000 each year for the 20 years. Additionally, the subsidiary should be sold for $225,000 at the end of the 20 year life; however, the subsidiary costs $30,000 in anticipated legal fees in the first year, and it must have advertising campaigns that cost of $70,000 at the end of yearseven, and fourteen. Your company’s hurdle rate or MARR is 12%. It will cost $300,000 to purchase this subsidiary from the owner. To start, draw the cash flow diagram.

1. [25] Find the Present Worth (or Net Present Value) of this project. Also, find the Annual Worth, and the Future Worth.

Answer 1

MARR = 12% = 0.12

Initial cost = 300000

Legal fees = 30000 in 1st year

Advertisement cost = 70000 in yr 7 and yr 14

income = 50000 every year

Salvage value = 225000 after 20 years

t = 20 years

cash Flow diagram

We will use formula P = F/(1+i)^t for finding the present value of single cash flow in future

and P/A factor for finding cash flow of uniform series

The present value of the cash flow = -300000 - 30000/1.12 - 70000/(1.12^7) - 70000/(1.12^14) + 50000 *(P/A, 12%, 20) + 225000/(1.12^20)

= -300000 - 30000/1.12 - 70000/(1.12^7) - 70000/(1.12^14) + 50000*7.46944 + 225000/(1.12^20)

NPV = 24023.48

Future value = 24023.48 * (F/P,12%,20)

=  24023.48 * 9.646293 = 231737.49

Annual worth = Present worth * (A/P, 12%, 20)

= 24023.48 * 0.133878

= 3216.23