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 | |||||
ekkarill92 answered 1 year agoRelated Solutions
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $720,000
Projected product life cycle: five years
Equipment: $740,000 with a salvage value of $100,000 after five
years
Expected increase in working capital: $120,000 (recoverable at
the end of five years)
Annual cash operating expenses: estimated at $432,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the
following data associated with production of a new product:
Expected annual revenues: $760,000
Projected product life cycle: five years
Equipment: $780,000 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 $456,000
Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
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: $730,000 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...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
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...
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
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...
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The controller of Blossom Production has collected the following monthly expense data for analyzing the cost...
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Total
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Machine Hours
January
$2,660
230
February
3,050
330
March
3,520
460
April
4,770
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May
3,190
420
June
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July
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August
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September
5,040
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October
4,270
610
November
3,260
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(a)
Determine the fixed- and variable-cost components using the
high-low method.
Fixed-costs
$
Variable-costs
$
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