Purchase Solution

Construct the annual cash flows and calculate the NPV and PI

Not what you're looking for?

Ask Custom Question

11.21

*Expenses -% of Sales
Year Units Sold Selling price COGS Marketing Admin Expenses
1 125 $80.00 70.00% 24.00% $180.00
2 250 82 68.00% 22.00% 150
3 300 85 68.00% 20.00% 150
4 250 80 66.00% 15.00% 150

*all expenses exclude depreciation

Working Captial: $600 initially Year (0); $200 (year 1): full recovery
Initial investment: $4,800
Salavge value: $500 at the end of year 4
Tax rate: 39%
Cost of capital: 10%

Assume: (1) Straight-line depreciation to zero and (2) any taxable losses can be immediately used to
offset taxable income somewhere else in the company.

A) Contrauct the annual cash flows and calculate the NPV and PI for a project with the given
information above.

B) You hire a VP, who believe that by using a higher percentae of media advertising she can increase
the number of units sold each year by 100. Recalculate the cash flows and NPV assuming this new campaign
requires an additioanl $50 increase in administration expense and 2% (200 basis point) increase
in marketing (or 26, 24, 22, and 17% in years 1 through 4, respectively) to cover the additional
advertising in each of the four years to support the higher sales level. Is this a better alternative?

C) You believe the tactic of the VP is riskier and should be discounted at a higher discount rate
of 15%. Recalculate the revised projects NPV. Should you make the added investment?

Attachments
Purchase this Solution
Solution Summary

The expert constructs the annual cash flows and calculates the NPV and PI.

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Operations Management

This quiz tests a student's knowledge about Operations Management

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

View More Free Quizzes
Related BrainMass Solutions

  • Time Value of Money

    PI= NPV/I We then rank the project's PI from highest to lowest, and then select from the top of the list until the capital budget is exhausted.

  • Capital Budgeting - Payback, NPV, PI, IRR

    If the cash flows are an annuity, then we can simply divide the cost by the annual cash flow to determine the payback period ? Otherwise, we calculate the cumulative cash flow and note when it becomes positive.

  • Capital Budgeting, Break-even

    The expected annual free cash flows from each project are as follows: YEAR PROJECT A PROJECT B 0 −$50,000 −$70,000 1 12,000 13,000 2 12,000 13,000 3 12,000 13,000 4 12,000 13,000 5 12,000 13,000 6 12,000 13,000 Calculate the NPV,

  • NPV of a Merger

    The cash inflows are annuities; we can therefore use the present value interest factor for annuity (PVIFA) to calculate the Net Present Value NPV= PVIFA (10%, 4 years ) x Annual cash flow - Initial investment n= 4

  • Capital budgeting

    By using the difference in the cash flows and finding the IRR, the crossover point comes at 8.68% The solution explains how to calculate NPV, IRR, PI and MIRR

  • Calculating cash flows, after-tax salvage value, NPV and IRR

    Calculate the net cash flows for each year. Based on these cash flows, what are the project's NPV and IRR? Do these indicators suggest that the project should be undertaken?

  • Capital Budgeting of a Major Expansion of Product Lines

    The initial investment would be $2,500,000 and the project would generate incremental cash flows of $750,000 per year for six years. The cost of capital is 11 percent. Calculate the following: i. Calculate the NPV ii. Calculate the PI iii.

  • Calculating NPV and PI in the given case

    NPV=$911,393.73 PV of future cash flows=Sum of PV's of cash flows for 1-5 years=11,111,393.73 Initial Investment=10,200,000.00 PI =PV of future cash flows/Initial Investment=1.09 NPV of given project is a positive value and PI is

  • Capital Budgeting and Net Present Value

    Since the cash inflows are annuities we can use the present value interest factor for annuity (PVIFA) to calculate the Net Present Value NPV= PVIFA (10%, 20 years ) x Annual cash flow - Initial investment n= 20

View More Related Solutions