Question

1) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of 5,500,000 and would generate annual net cash inflows of $1,200,000 per year for 6 years. Calculate the project's NPV using a discount rate of 8 percent. If the discount rate is 8 percent, then the project's NPV is?  

2 Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of 105,000 and will generate net cash inflows of $16,000 per year for 11 years.

a.What is the project's NPV using a discount rate of 8%?Should the project be accepted? Why or why not?

b. What is the project's NPV using a discount rate of 14 percent? Should the project be accepted? Why or why not?

C .What is this project's internal rate of return? Should the project be accepted? Why or why not?

Answer 1

1) NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [1200000*1/(1.08)^1+1200000*1/(1.08)^2+1200000*1/(1.08)^3+1200000*1/(1.08)^4+1200000*1/(1.08)^5+1200000*1/(1.08)^6]-5500000

= $ 47,455.60

Answer = $ 47,455.60

2)

a. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [16000*1/(1.08)^1+16000*1/(1.08)^2+16000*1/(1.08)^3+16000*1/(1.08)^4+16000*1/(1.08)^5+16000*1/(1.08)^6+16000*1/(1.08)^7+16000*1/(1.08)^8+16000*1/(1.08)^9+16000*1/(1.08)^10+16000*1/(1.08)^11]- 105000

= $ 9,223.43

Since the NPV of the project is positive, the project must be accepted as it would be beneficial for the company.

Answer : NPV = $ 9,223.43

Project must be Accepted.

b. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= [16000*1/(1.14)^1+16000*1/(1.14)^2+16000*1/(1.14)^3+16000*1/(1.14)^4+16000*1/(1.14)^5+16000*1/(1.14)^6+16000*1/(1.14)^7+16000*1/(1.14)^8+16000*1/(1.14)^9+16000*1/(1.14)^10+16000*1/(1.14)^11]- 105000

= - $ 17,756.27

Since the NPV of the project is not positive, the project must not be accepted as it would not be beneficial for the company.

Answer : NPV = - $ 17,756.27

Project must not be Accepted

c.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

105,000 = 16000/(1.0x) +16000/ (1.0x)^2 +16000/(1.0x)^3+.....+ 16000/(1.0x)^11      

Or x= 9.776%

Hence the IRR is 9.78%

Since the IRR is less than the cost of capital, the project must be not be accepted.

Answer : IRR 9.78%

Not Accepted.