In: Accounting
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
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 | $ |
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 |