Determinig Net Present Value (NPV) of various Proposals
Not what you're looking for?
1.Uneven Cash Flows: Find the NPV (Net Present Value) of a project that requires an investment of $400 now; and another expense of $500 at the end of the 1st year. It gives cash inflows of $300 at the end of year 3, $400 at the end of year 4, and $800 at the end of year 5. The required rate of return is 11%. Is the project acceptable?
2.Depreciation and Taxes: Atlas Corp needs a new machine that will cost $50,000. Using the straight-line method, Atlas will depreciate it over its useful life of 5 yrs. The machine will add $14,000 annually to the earnings before interest and taxes (EBIT) of Atlas. The WACC of Atlas is 12% and its tax rate is 32%. Should Atlas install the machine?
3.After-Tax cash flows: You have the opportunity to invest $10,000 in a project that will generate a pretax return of $4,000 annually for the next 10 yrs. You are in the 28% tax bracket, and your after-tax required rate of return is 15%. Should you make the investment?
4. Uncertain Life: Mercy Hosp is planning to buy an X-ray machine whose total useful life is 4 yrs. However, there is a 25% chance that it may break down completely after 3 yrs. The machine will save $4,500 annually, and it will cost $11,000. The hospital is a tax-exempt entity, and its proper discount rate is 7%. Should Mercy buy the machine?
Purchase this Solution
Solution Summary
There are 4 problems related to capital budgeting techniques. Solutions to these problems explain the methodology to analyze investment proposals based upon NPV method.
Solution Preview
Please refer attached file for better clarity of tables and formulas.
Solution:
1.
Let us see cash flows associated with project
PV of cash flow=Future Value of cash flow/(1+required rate of return)^period
Year End Cash Flow PV
0 -400 -400/(1+11%)^0=-400.00
1 -500 -500/(1+11%)^1=-450.45
2 0/(1+11%)^2=0.00
3 300 300/(1+11%)^3=219.36
4 400 400/(1+11%)^4=263.49
5 800 800/(1+11%)^5=474.76
NPV 107.16
-ve sign indicate cash outflow
We get a positive value of NPV ($107.16), It is acceptable.
2.
Depreciation per year=(Purchase Value-Salvage Value)/Useful life
Depreciation per year=(50000-0)/5= $10,000.00
Required rate of return=WACC=12%
Tax rate=32%
Let us see cash flows associated with the project
Taxes=(EBIT-Depreciation)*Tax Rate=(14000-10000)*32%= $1,280.00
Year End Machine Cost EBIT Taxes ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
- "Thank you"
- "Really great step by step solution"
- "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
- "Thanks Again! This is totally a great service!"
- "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
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.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations