Question

In: Accounting

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 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 $150,000? 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

Part- 1&2 Computation of Annual Cash Flow & NPV- Carsen Sorensen
Year 0 1 2 3 4 5
Cost Of Machine -$800,000.00
Investment In Working Capital -$100,000.00
Expected Annual Revenue $750,000.00 $750,000.00 $750,000.00 $750,000.00 $750,000.00
Less Operating Expense -$450,000.00 -$450,000.00 -$450,000.00 -$450,000.00 -$450,000.00
Operating Profit $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00
Recovery Of Working Capital $100,000.00
Scrap Value Of Equipment $100,000.00
Net Operating Cash Flow (a) -$900,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $500,000.00
PVF @ 8% (b) 1.000000 0.925926 0.857339 0.793832 0.735030 0.680583
Present Value (aXb) -$900,000.00 $277,777.78 $257,201.65 $238,149.67 $220,508.96 $340,291.60
NPV" $433,929.65
Part-3 Commputation of NPV
Year 0 1 2 3 4 5
Cost Of Machine -$800,000.00
Investment In Working Capital -$100,000.00
Expected Annual Revenue 900000 900000 900000 900000 900000
Less Operating Expense -$450,000.00 -$450,000.00 -$450,000.00 -$450,000.00 -$450,000.00
Operating Profit $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00
Recovery Of Working Capital $100,000.00
Scrap Value Of Equipment $100,000.00
Net Operating Cash Flow (a) -$900,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $650,000.00
PVF @ 8% (b) 1.0000 0.9259 0.8573 0.7938 0.7350 0.6806
Present Value (aXb) -$900,000.00 $416,666.67 $385,802.47 $357,224.51 $330,763.43 $442,379.08
NPV" $1,032,836.16

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