Economic consideration is being given for a proposal to build out a new business. All capital and operating costs are in thousands of dollars. Revenue is forecasted for six years and is also in thousands of dollars. Use a 15% minimum discount rate to evaluate the given proposal. Calculate the Net Present Value (NPV), Rate of Return (ROR), Growth Rate of Return (GROR), Present Value Ratio (PVR), and Benefit Cost Ratio (B/C Ratio). Please interpret all your findings. Finally, what time zero capital expense would give you exactly a 15% rate of return? Project Costs and Incomes are shown on the diagram in thousands of $ Year 0 1 2 3 0 400 550 0 0 -200 -300 Revenue Capital Costs Operating Costs BTCF -400 -100 300 -200 -200 4 700 0 -400 5 850 0 -500 6 1,000 0 -600

Economic consideration is being given for a proposal to build out a new business. All capital and operating costs are in thousands of dollars. Revenue is forecasted for six years and is also in thousands of dollars. Use a 15% minimum discount rate to evaluate the given proposal. Calculate the Net Present Value (NPV), Rate of Return (ROR), Growth Rate of Return (GROR), Present Value Ratio (PVR), and Benefit Cost Ratio (B/C Ratio). Please interpret all your findings. Finally, what time zero capital expense would give you exactly a 15% rate of return? Project Costs and Incomes are shown on the diagram in thousands of $ Year 0 1 2 3 0 400 550 0 0 -200 -300 Revenue Capital Costs Operating Costs BTCF -400 -100 300 -200 -200 4 700 0 -400 5 850 0 -500 6 1,000 0 -600

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

See similar textbooks

Similar questions

Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
A restaurant is considering the purchase of new tables and chairs for their dining room with an initial investment cost of $515,000, and the restaurant expects an annual net cash flow of $103,000 per year. What is the payback period?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Towson Industries is considering an investment of $256,950 that is expected to generate returns of $90,000 per year for each of the next four years. What Is the Investments internal rate of return?
Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a net cash inflow one year from now of 810,000. Assume the cost of capital is 10 percent. Required: 1. Break the 810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?
Economic consideration is being given for a proposal to build out a new business. All capital and operating costs are in thousands of dollars. Revenue is forecasted for six years and is also in thousands of dollars. Use a 15% minimum discount rate to evaluate the given proposal. Calculate the Net Present Value (NPV), Rate of Return (ROR), Growth Rate of Return (GROR), Present Value Ratio (PVR), and Benefit Cost Ratio (B/C Ratio). Please interpret all your findings. Finally, what time zero capital expense would give you exactly a 15% rate of return? Project Costs and Incomes are shown on the diagram in thousands of $ Year 0 1 2 0 400 0 -200 Revenue Capital Costs Operating Costs BTCF -400 -100 300 -200 -200 3 550 0 -300 700 0 -400 5 850 0 -500 1,000 0 -600
Perform a financial analysis for a project using the format below. Assume the projected costs and benefits for this project are spread over four years as follows: estimated costs are $100,00 in year 1 and $25,000 each year 2, 4, and 4. (hint: just change the years in the template file from 0,1,2,3, and 4. This discount factors will automatically be recalculated). Estimated benefits are $0 in Year 1 and $80,000 each years 2,3, and 4. Use an 8% discount rate. Use the business case financials template provided on the companion web site to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, explain whether you would recommend investing in this project based on your financial analysis.
Perform a financial analysis for a project. Assume that the projected costs and benefits for this project are spread over 6 years as follows. Estimated costs are $1,100,000 in Year 0, and $50,000 each year in Years 1, 2, 3, 4, 5 and 6. Estimated benefits are $0 in Year 0, and $450,000 each year in Years 1, 2, 3, 4, 5 and 6. Use a 15% discount rate. Suppose the required payback period and discounted payback period are both 3 years. (1) Calculate the payback period (based on the original cash flows without discounting), and evaluate the project based on the payback method. (2) Calculate the discounted payback period (based on discounted cash flows), and evaluate the project based on the discounted payback method. (3) Evaluate the project using the NPV method, and explain whether you would recommend investing in this project.