NPV and maximum return DC Fragrance considers purchasing a new fragrance mixing machine for a $245,000 initial investment. The machine generates an annual after-tax cash inflow of $68,500 for five years. a. Determine the net present value (NPV) of the machine, assuming that the firm has a 15% cost of capital. Is the project acceptable? b. If the firm's cost of capital is lower than 15%, does the investment in the machine become more or less desirable? What is the highest cost of capital (closest whole percentage rate) that the firm can have and still find that purchasing the machine is worthwhile? Discuss this finding in light of your response in part a.

NPV and maximum return DC Fragrance considers purchasing a new fragrance mixing machine for a $245,000 initial investment. The machine generates an annual after-tax cash inflow of $68,500 for five years. a. Determine the net present value (NPV) of the machine, assuming that the firm has a 15% cost of capital. Is the project acceptable? b. If the firm's cost of capital is lower than 15%, does the investment in the machine become more or less desirable? What is the highest cost of capital (closest whole percentage rate) that the firm can have and still find that purchasing the machine is worthwhile? Discuss this finding in light of your response in part a.

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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1. A project requires an initial capital cost of (40 million ID). The investor expects the project will generate annual returns of (12 million ID), with expenditures about (4 million ID) annually. If you know that the economic life is (12) years, and the salvage value after the end of the economic life is (4 million ID). Considering that the less acceptable interest rate for the investor is (10%): A. Determining the economic feasibility for investing using the present worth method? B. What is the equivalent annual worth of this investment? C. Find the internal rate of return?
Investment Timing Option: Decision-Tree Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $24 million. Kim expects the hotel will produce positive cash flows of $4.08 million a year at the end of each of the next 20 years. The project's cost of capital is 12%. a. What is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ 10.68 million
None
Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $50,000 2 35,000 3 30,000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. c. If the opportunity cost of capital is 10%, what is the project's NPV? d. What is the project IRR?
NPV (net present value) Craig is considering several capital investments for the upcoming year. Use the NPV (net present value) method to determine whether the company should investment in the following independent projects: Project 1 costs $28,000 and offers 8 annual cash flows of $8,600. Craig feels this type of investment should require an annual return of 16% on projects like this. Project 2 costs $35,000 and offers 6 annual cash flows of $12,000. Craig feels this type of investment should require an annual return of 12% on projects like this. Requirements 1. Calculate the NPV of both of these projects 2. What is the maximum acceptable price Craig should pay for each of these projects?
Explain how did it get the after-tax cash flow, NPV, EVA, and MVA
Payback, NPV, and IRR Rieger International is evaluating the feasibility of investing $87,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown in the following table: E. The firm has a 9% cost of сapital. a. Calculate the payback period for the proposed investment. b. Calculate the net present value (NPV) for the proposed investment. c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment. d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? ..... a. The payback period of the proposed investment is years. (Round to two decimal places.) b. The NPV of the proposed investment is $ (Round to the nearest cent.) c. The IRR of the proposed investment is %. (Round to two decimal places.) d. Should Rieger International accept or reject the proposed investment?…
A company is considering a 10-year capital investment project. The project has annual positive cash flows each year. The accounting manager has calculated the NPV of the same project using three different costs of capital (8%, 10% and 18 %) as discount rates. Select the most logical combination of NPVS from the choices given. Note: You cannot calculate the NPVS nor do you need to. O $(5,743) $3,152 $6,612 O $(5,743) $6,612 $3,152 $3,152 $6,512 $(5,743) O $6,512 $3,152 $(5,743) O None of the above
What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 8% on investment. Project D costs $5,000 and will generate sales of $4,000 each year for 5 years. The cash expenditures will be $1,500 per year. The firm uses straight-line depreciation with an estimated salvage value of $500 and has a tax rate of 25%. (2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.)
Question 2 A firm is considering an investment project that has a cost of $1 million and is expected to generate an annual after-tax cash flow of $250,000 for five years. It has already spent $25,000 in research and development (R&D) costs for the project. If the firm's required rate of return is 14 percent and consider R&D a sunck cost, what is the NPV of this project? A $25,000 B -$141,750 C +141,750 D $858,250
Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.68 million per year for 10 years. The opportunity cost of capital is 11.15%, which reflects the project's business risk. a. Suppose the project is financed with $4 million of debt and $6 million of equity. The interest rate is 7.15% and the marginal tax rate is 21%. An equal amount of the debt will be repaid in each year of the project's life. Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole number.) X Answer is complete but not entirely correct. Adjusted present value S 120,980 x b. If the firm Incurs issue costs of $610,000 to raise the $6 million of required equity, what will be the APV? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole number. Negative amount shoud be…
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