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Capital Budgeting for Uma Corporation

At the end of 2005, Uma Corporation was considering undertaking a major long-term project in an effort to remain competitive in its industry. The production
and sales departments determined the potential annual cash flow savings that could accrue to he firm if it acts soon. Specifically, they estimate that a mixed stream of future
cash flow savings will occur at the end of the years 2006 through 2011. The years 2012 through 2016 will see consecutive and equal cash flow savings at the end
of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2012 through 20156 will be 11%
The project managers will find the project acceptable if it results in present cash flow savings of at least $860,000. The following data is available to assist you:
a) Determine the value - at the beginning of 2006 - of the future cash flow savings expected to be generated by this project.
b) Should the firm undertake this project? Why or why not?
5 points
Uma Corp.
Present Value of Expected Future Savings
Period: 2006 through 2016

Discount rate for years 2006 - 2011 7%
Discount rate for years 2012 - 2016 11%

Annual Present
Year Period Savings PVIF PVIFA PVIF Value
2006 1 $110,000
2007 2 120,000
2008 3 130,000
2009 4 150,000
2010 5 160,000
2011 6 150,000
2012 7 90,000
2013 8 90,000
2014 9 90,000
2015 10 90,000
2016 11 90,000
$1,270,000 $-

Solution Summary

The solution explains how to decide whether to accept or reject the project

$2.19