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Net Present Value (NPV)

Net present value

You buy (t=0) an apartment building for $500,000. You expect to earn $40,000 a year in rent for the following 3 years (t=1-3). Then, at the end of year 3, you expect to sell the building for $550,000. The required rate of return for this sort of investment is 10%. The risk-free rate is 5%. Clearly show how you would calculate

A) Find the annual depreciation expense and accumulated depreciation for the server. b) Prepare an after-tax analysis and calculate the after-tax NPV. c) Should the investment be undertaken? Why?

Solitaire Company is planning to purchase a computer server for $400,000 to handle purchase orders from the Internet. Installation for this computer server costs $8,500. It's initial cost, operating costs, income, and salvage value are represented in the following cash flow diagram: (see attachment for diagram) This compute

Replacement decision

A toy company currently uses an injection-moulding machine that was purchased two years ago. This machine is being depreciated on a straight-line basis toward a $500 salvage value, and it has 6 years of remaining life. Its current book value is $2,600 and it can be sold for $3,000 at this time. The firm is offered a

Solution to "NPV and IRR" question

NPV/IRR. Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of this year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5 percent. a. If the

Project Evaluation using NPV

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straightline over 5 years to a value of zero, but in fact it can be sold after 5 years for $500,000. The firm believes that working capital at each date must be maint

ABC Manufacturing is thinking of launching a new product.

Year zero, Check your net cash flow. You have a tax loss. That has an impact on cash flow (CF) and needs to be taken into account either in year zero or in subsequent years, with the correct method to account for it in the spreadsheet in year 0. Year 0, then list year 1 to year 8 but don't create a cumulative column so you can

ABC Manufacturing: Cash flows, payback period, NPV for project

ABC Manufacturing is thinking of launching a new product. The company expects to sell $900,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project will r

Evaluating Potential Projects Question

When evaluating potential projects, which of the following factors should be incorporated as part of a project's estimated cash flow? A) Any sunk costs that were incurred in the past prior to considering the proposed project. B) Any opportunity costs that are incurred if the project is undertaken. C) Any externalities (both

Managerial Finance - NPV calculations

12. The Nagud Company had the following financial information in the annual audited financial statements. Balance Sheet Current Assets Current Liabilities Cash $ 2,500 Accounts Payable $5,000

Fiancial Management

Year Undiscounted free cash flows 0 (380,000) 1 20,000 2 30,000 3 200,000 4 175,000 5 130,000 6 145,000 Required rate of return 15% 5. Assume the required rate of return increases to 20%. The net present value of the investment

Cash Flow

1. An investment requires an initial outlay of $1,500,000 and generates cash flows of $200,000 at the end of each year for ten years. The required return is 10%. Find the net present value, profitability index and the payback period. Is the investment desirable? 2. 40% tax bracket. Compute the after-tax cash flows for th

A. Prepare a table determining the after-tax net cash flows for this project for years 0 thru 5. b. Determine the NPV for this project. Show all work. c. Make a recommendation to the CFO about this project. Strongly defend your recommendation.

General Electric is considering the investment in a capital project. The initial cost in year 0 is $100,000 to be depreciated straight line over 5 years to an expected salvage value of $5,000. The firm?s tax rate is 35% and it has an 11% cost of capital. For this project an additional investment in working capital of $8,000 is r

Sources of financing new business projects

(i) Other than the net present value (NPV)give an analysis of other matters to be considered in decision process. ie. IRR, PAYBACK and analyse these options in detail. (ii) Evaluate appropriate sources of finance that could be used to fund the setting up a new factory for a privately family owned company. (The company produ

Net Present Value - Sleep-Easily Ltd

Net Present Value - See the attached file. Sleep-Easily Ltd manufactures high quality, branded orthopaedic furniture in Manchester. The products are made in limited numbers and for limited production periods of usually no more than six years. All products are sold on the Web, supported by speciality magazine advertising. A s

NPV of projects

#1 The Acme Manufacturing has a project involving the purchase of equipment for $35,000 that will increase sales of Acme Manufacturing by $ 14,500 per year. The annual running costs of this equipment for the first 3 years are $ 1,000, $ 2,000, and $ 4,000 respectively. It will increase by $ 3,500 every year from then on. The e


Problem #3 (26.) Abandonment Option. Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 50,000 units a year at a price of $60 each. If the new product is a bust, only 30,000 units can be sold at a price of $55. The variable cost of each ba

Pappy's Potato: Calculating Project Cash Flows and NPV for your portfolio

Calculating Project Cash Flows and NPV - See attached file. If your portfolio is invested 30 percent each in A and B and 40 percent in C, what is the portfolio's expected return? The variance? The standard deviation? b. If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? c. I

Certainty equivalent net present value: Accept - reject decision

1. Certainty equivalents - Accept - reject decision Pleasantville ball valve has constructed a table, shown below, that gives expected cash inflows and certainty equivalent factors for these cash inflows. These measures are for a new machine with a five-year life that requires an initial investment of $95,000. The fir

Calculation of the NPV (net present value) of alternative manufacturing options.

A manager must decide how many machines of a certain type to buy. The machines will be used to manufacture a new gear for which there is increased demand. The manager has narrowed the decision to two alternatives: buy one machine or buy two. If only one machine is purchased and demand is more than it can handle, a second machine


Cusic Cordwood Co. has a project available that will provide aftertax cash flows of $185,000 for the next 6 years. The project has more risk than the company, so the president has told you to use an adjustment factor of plus 2 (+2) percent in your calculations. The company uses 65% equity and 35% debt in its capital structure

Finance: Optimal replacement cycle for machinery and when it should be replaced.

Gillian is deciding whether to replace an old machine, and has assembled some information (refer to attachment File #1). She believes that the second-hand market value of either machine will decline over time in line with the depreciation schedule (eg. the old machine should sell for $3,000 today). If there are no taxes, and Gil