Question
In: Accounting
Patterson Company is considering two competing investments. The first is for a standard piece of production...
Patterson Company is considering two competing investments. The first is for a standard piece of production equipment. The second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows are as follows:
Year
Standard equipment
CAM equipment
R
R
0
5 000 000
20 000 000
1
3 000 000
1 000 000
2
2 000 000
2 000 000
3
1 000 000
3 000 000
4
1 000 000
4 000 000
5
1 000 000
4 000 000
6
1 000 000
4 000 000
7
1 000 000
5 000 000
8
1 000 000
10 000 000
9
1 000 000
10 000 000
10
1 000 000
10 000 000
Patterson uses a discount rate of 18% for all its investments. Patterson’s cost of capital is 10%.
2.4 Calculate the NPV for each investment by using a discount rate of 18%. (11)
2.5 Calculate the NPV for each investment by using a discount rate of 10%. (11)
2.6 Which rate is the best for Patterson and why?
Solutions
Expert Solution
Answer 2.4
-
2.5 :-
2.6 :-
The 10% is best for Patterson because
10% of both Standard equipment and Cam equipment NPV are in positive way and 18% of Standard equipment NPV is in positive and Cam equipment NPV is in negative way.
ekkarill92 answered 1 year agoRelated Solutions
Patterson Corp. is considering the purchase of a new piece of equipment, which would have an...
Patterson Corp. is considering the purchase of a new piece of
equipment, which would have an initial cost of $528,000, a 7-year
life, and $150,000 salvage value. The increase in net income each
year of the equipment's life would be as follows:
Year 1
$
105,000
Year 2
$
97,000
Year 3
$
95,000
Year 4
$
84,000
Year 5
$
81,000
Year 6
$
76,000
Year 7
$
70,000
What is the payback period?
Multiple Choice
5.92 years
6.13...
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,400,000. Patterson...
J & J Enterprises is considering a cash acquisition of
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following pattern of cash inflows and synergistic benefits for the
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formula and financial calculator methods.
Years
1–5
6–15
16–20
Cash inflow (aftertax)
$
480,000
$
640,000
$
840,000
Synergistic benefits (aftertax)
44,000
64,000
74,000
The cost of capital...
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,400,000. Patterson...
J & J Enterprises is considering a cash acquisition of
Patterson Steel Company for $4,400,000. Patterson will provide the
following pattern of cash inflows and synergistic benefits for the
next 20 years. There is no tax loss carryforward. Use Appendix D as
an approximate answer, but calculate your final answer using the
formula and financial calculator methods.
Years
1–5
6–15
16–20
Cash inflow (aftertax)
$
480,000
$
640,000
$
840,000
Synergistic benefits (aftertax)
44,000
64,000
74,000
The cost of capital...
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,000,000. Patterson...
J & J Enterprises is considering a cash acquisition of
Patterson Steel Company for $5,000,000. Patterson will provide the
following pattern of cash inflows and synergistic benefits for the
next 20 years. There is no tax loss carry-forward.
Years
1–5
6–15
16–20
Cash inflow (aftertax)
$540,000
$700,000
$900,000
Synergistic benefits (aftertax)
$ 50,000
$ 70,000
$ 80,000
The cost of capital for the acquiring firm is 15 percent.
a. Calculate the net present value.
(Use a Financial calculator to arrive...
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Clarion Enterprises is considering two potential investments with differing cash flow periods. This is the first...
Clarion Enterprises is considering two potential investments
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CF0
-98171
CF1
23100
CF2
3500
CF3
27700
CF4
12800
CF5
21200
CF6
22700
Company Cost
of Capital
7
Given the above cash flows and investor's required rate of
return, what is the Annualized Net
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J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,200,000.
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,200,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
Years
1–5
6–15
16–20
Cash inflow (aftertax)
$
560,000
$
720,000
$
920,000
Synergistic benefits (aftertax)
...
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