Question

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 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_________________________$___________

Answer 1

Req 1
			Year 0	Year 1-4	Year 5
Initial Invstment			-720000
Workin capital investment			-100000
Annual Revenue				740000	740000
Annual Operating expense				-444000	-444000
Salvage value of equipment					100000
Working capital released					100000
Cash flows			-820000	296000	496000
Year	Cash flows
YEar0	-820000
Year 1-4	296000
Year 5	496000
Req 2:
Net present value
Year	Cash flows	PVF @ 8%	Present Value
YEar0	-820000	1	-820000
Year 1-4	296000	3.3121	980381.6
Year 5	496000	0.6806	337577.6
Net present value			497959
Req 3:
Revised Net present value (cash flows from Year1-5 will be reduced by $ 148000)
Year	Cash flows	PVF @ 8%	Present Value
YEar0	-820000	1	-820000
Year 1-4	148000	3.3121	490190.8
Year 5	348000	0.6806	236848.8
Net present value			-92960