Griffey & Son operates a plant in Cincinnati and is considering opening a new facility in Seattle. The initial outlay will be $3,500,000 and should produce after-tax net cash inflows of $600,000 per year for 15 years. Due to the effects of the ocean air in Seattle, however, the plant’s useful life may be only 12 years. Cost of capital (discount rate) is 14%. Required:1. Based on an NPV analysis, should the project be accepted if a 15-year useful life is assumed? What if a 12-year useful life is used? Use appropriate present value annuity factors from Appendix C, Table 2. (Round final answers to the nearest whole dollar. Negative amounts should be indicated with a minus sign.)2. How many years will be needed for the Seattle facility to earn at least a 14% return? (Hint: Use the =NPER function in Excel or the formula for the present value annuity factor given at the bottom of Appendix C, Table 2 to answer this question.) (Do not round intermediate calculations and round final answer to 1 decimal place.)Appendix C, Table : TABLE 2Present Value of Annuity of $1Periods 4%5%6%7%8%9%10%11%12%13%14%15%20%25%30%10.9620.9520.943 0.9350.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.833 0.800 0.76921.8861.8591.8331.8081.7831.759 1.736 1.713 1.690 1.668 1.647 1.626 1.528 1.440 1.36132.7752.723 2.673 2.6242.5772.531 2.487 2.444 2.402 2.361 2.322 2.283 2.106 1.952 1.81643.6303.546 3.465 3.3873.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.589 2.362 2.1664.4524.329 4.2124.1003.9933.890 3.791 3.696 3.605 3.517 3.433 3.352 2.991 2.689 2.43665.2425.076 4.917 4.767 4.6234.486 4.355 4.231 4.111 3.998 3.889 3.784 3.326 2.951 2.64376.0025.786 5.582 5.389 5.2065.033 4.868 4.712 4.564 4.423 4.288 4.160 3.605 3.161 2.8026.7336.4636.210 5.9715.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 3.837 3.329 2.9259.7.4357.108 6.802 6.5156.2475.995 5.759 5.537 5.328 5.132 4.946 4.772 4.031 3.463 3.019108.1117.722 7.360 7.0246.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.192 3.571 3.092118.760 8.306 7.887 7.4997.1396.805 6.495 6.207 5.938 5.687 5.453 5.234 4.327 3.656 3.147129.385S.863 8.3847.9437.5367.161 6.814 6.492 6.194 5.918 5.660 5.421 4.439 3.725 3.190139.986 9.394S.853S.3587.9047.487 7.103 6.750 6.424 6.122 5.842 5.583 4.533 3.780 3.2231410.563 9.899 9.295S.7458.2447.786 7.367 6.982 6.628 6.302 6.002 5.724 4.611 3.824 3.2491511.118 10.380 9.7129.1088.559S.061 7.606 7.191 6.811 6.462 6.142 5.847 4.675 3.859 3.2681611.652 10.838 10.1069.4478.8518.313 7.824 7.379 6.974 6.604 6.265 5.954 4.730 3.887 3.2831712.166 11.274 10.477 9.7639.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 4.775 3.910 3.2951812.659 11.690 10.828 10.0599.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 4.812 3.928 3.3041913.134 12.085 11.158 10.3369.604S.950 8.365 7.839 7.366 6.938 6.550 6.198 4.843 3.942 3.3112013.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 4.870 3.954 3.3162214.451 13.163 12.042 11.061 10.2019.442 8.772 8.176 7.645 7.170 6.743 6.359 4.909 3.970 3.3232415.247 13.799 12.550 11.469 10.5299.707 8.985 8.348 7.784 7.283 6.835 6.434 4.937 3.981 3.3272515.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.873 6.464 4.948 3.985 3.3293017.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 4.979 3.995 3.3323518.665 16.374 14.498 12.948 11.655 10.567 9.644 8.355 S.176 7.586 7.070 6.617 4.992 3.998 3.3334019.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6.642 4.997 3.999 3.333Note: The present value (PV) annuity factor for N periods and a rate of r per period = [1 - (1+r)- = r. For example, for N = 5 and r= 0.10, the PV annuityfactor = 3.791 (rounded).

The cost of capital is the minimum return estimated by the analyst and potential investors. The…

Answered: Griffey & Son operates a plant in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Griffey & Son operates a plant in Cincinnati and is considering opening a new facility in Seattle. The initial outlay will be $3,500,000 and should produce after-tax net cash inflows of $600,000 per year for 15 years. Due to the effects of the ocean air in Seattle, however, the plant’s useful life may be only 12 years. Cost of capital (discount rate) is 14%.

Required:

1. Based on an NPV analysis, should the project be accepted if a 15-year useful life is assumed? What if a 12-year useful life is used? Use appropriate present value annuity factors from Appendix C, Table 2. (Round final answers to the nearest whole dollar. Negative amounts should be indicated with a minus sign.)

2. How many years will be needed for the Seattle facility to earn at least a 14% return? (Hint: Use the =NPER function in Excel or the formula for the present value annuity factor given at the bottom of Appendix C, Table 2 to answer this question.) (Do not round intermediate calculations and round final answer to 1 decimal place.)

Appendix C, Table :

TABLE 2
Present Value of Annuity of $1
Periods 4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
20%
25%
30%
1
0.962
0.952
0.943 0.935
0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.833 0.800 0.769
2
1.886
1.859
1.833
1.808
1.783
1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.528 1.440 1.361
3
2.775
2.723 2.673 2.624
2.577
2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.106 1.952 1.816
4
3.630
3.546 3.465 3.387
3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.589 2.362 2.166
4.452
4.329 4.212
4.100
3.993
3.890 3.791 3.696 3.605 3.517 3.433 3.352 2.991 2.689 2.436
6
5.242
5.076 4.917 4.767 4.623
4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.326 2.951 2.643
7
6.002
5.786 5.582 5.389 5.206
5.033 4.868 4.712 4.564 4.423 4.288 4.160 3.605 3.161 2.802
6.733
6.463
6.210 5.971
5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 3.837 3.329 2.925
9.
7.435
7.108 6.802 6.515
6.247
5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.031 3.463 3.019
10
8.111
7.722 7.360 7.024
6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.192 3.571 3.092
11
8.760 8.306 7.887 7.499
7.139
6.805 6.495 6.207 5.938 5.687 5.453 5.234 4.327 3.656 3.147
12
9.385
S.863 8.384
7.943
7.536
7.161 6.814 6.492 6.194 5.918 5.660 5.421 4.439 3.725 3.190
13
9.986 9.394
S.853
S.358
7.904
7.487 7.103 6.750 6.424 6.122 5.842 5.583 4.533 3.780 3.223
14
10.563 9.899 9.295
S.745
8.244
7.786 7.367 6.982 6.628 6.302 6.002 5.724 4.611 3.824 3.249
15
11.118 10.380 9.712
9.108
8.559
S.061 7.606 7.191 6.811 6.462 6.142 5.847 4.675 3.859 3.268
16
11.652 10.838 10.106
9.447
8.851
8.313 7.824 7.379 6.974 6.604 6.265 5.954 4.730 3.887 3.283
17
12.166 11.274 10.477 9.763
9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 4.775 3.910 3.295
18
12.659 11.690 10.828 10.059
9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 4.812 3.928 3.304
19
13.134 12.085 11.158 10.336
9.604
S.950 8.365 7.839 7.366 6.938 6.550 6.198 4.843 3.942 3.311
20
13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 4.870 3.954 3.316
22
14.451 13.163 12.042 11.061 10.201
9.442 8.772 8.176 7.645 7.170 6.743 6.359 4.909 3.970 3.323
24
15.247 13.799 12.550 11.469 10.529
9.707 8.985 8.348 7.784 7.283 6.835 6.434 4.937 3.981 3.327
25
15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 7.330 6.873 6.464 4.948 3.985 3.329
30
17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7.003 6.566 4.979 3.995 3.332
35
18.665 16.374 14.498 12.948 11.655 10.567 9.644 8.355 S.176 7.586 7.070 6.617 4.992 3.998 3.333
40
19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6.642 4.997 3.999 3.333
Note: The present value (PV) annuity factor for N periods and a rate of r per period = [1 - (1+r)- = r. For example, for N = 5 and r= 0.10, the PV annuity
factor = 3.791 (rounded).

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