A market study completed for a company reveals that the company can expect annual revenues of $300,000 for selling their new earphones. Equipment to produce the earphones will cost $320,000. After 5 years, the equipment can be sold for $40,000. In addition to equipment, working capital is expected to increase by $40,000 because of increases in inventories and receivables. The company expects to recover the investment in working capital by the end of the project's life. Annual cash operating expenses are estimated at $180,000. The required rate of return is 12%.Estimate the annual net cash flows.Calculate the present value for each year using the discount factor and then calculate the total net present value of the investment. Use Exhibit 12B.1 in the eBook or Excel to find the discount values.What does a discount factor of 1 (like we see in the first row of the table in #2) mean?Based on the NPV, should the company produce the line of earphones?If the company re-evaluated their required rate of return and moved it up to 15%, all else remaining the same, would the NPV increase or decrease from what you calculated in #2?v

1. Annual Net Cash Flows (NCF):Data:Revenue: $300,000/year.Cash Operating Expenses:…

Answered: A market study completed for a company…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EB: Caduceus Company is considering the purchase of a new piece of factory equipment that will cost...

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A market study completed for a company reveals that the company can expect annual revenues of $300,000 for selling their new earphones. Equipment to produce the earphones will cost $320,000. After 5 years, the equipment can be sold for $40,000. In addition to equipment, working capital is expected to increase by $40,000 because of increases in inventories and receivables. The company expects to recover the investment in working capital by the end of the project's life. Annual cash operating expenses are estimated at $180,000. The required rate of return is 12%.

Estimate the annual net cash flows.
Calculate the present value for each year using the discount factor and then calculate the total net present value of the investment. Use Exhibit 12B.1 in the eBook or Excel to find the discount values.
What does a discount factor of 1 (like we see in the first row of the table in #2) mean?
Based on the NPV, should the company produce the line of earphones?
If the company re-evaluated their required rate of return and moved it up to 15%, all else remaining the same, would the NPV increase or decrease from what you calculated in #2?v

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