2. Exercise 14-28
Net Present Value
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.
a. Southward Manufacturing is considering the purchase of a new welding system. The cash benefits will be $400,000 per year. The system costs $2,250,000 and will last 10 years.
b. Kaylin Day is interested in investing in a women’s specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $35,000 per year. She estimates that the shop will have a useful life of six years.
c. Goates Company calculated the NPV of a project and found it to be $21,300. The project’s life was estimated to be eight years. The required rate of return used for the NPV calculation was 10 percent. The project was expected to produce annual after-tax cash flows of $45,000.
1. Compute the NPV for Southward Manufacturing, assuming a discount rate of 12 percent. Round to the nearest dollar.
Should the company buy the new welding system?
2. Conceptual Connection: Assuming a required rate of return of 8 percent, calculate the NPV for Kaylin Day’s investment. Round to the nearest dollar.
Should she invest?
Calculate the NPV assuming the estimated return was $45,000 per year. Round to the nearest dollar.
Would this affect the decision? What does this tell you about your analysis?
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
3. What was the required investment for Goates Company’s project? Round to the nearest dollar.