Risk and NPV; Sensitivity Analysis J. Morgan of SparkPlug Inc. has been approached to takeover a production facility from B.R. Machine Company. The acquisition will cost $1,500,000, andthe after-tax net cash inflow are expected to be $275,000 per year for 12 years.SparkPlug currently uses 12% for its after-tax cost of capital. Tom Morgan, production manager,is very much in favor of the investment. He argues that the total after-tax net cash inflow is more thanthe cost of the investment, even if the demand for the product is somewhat uncertain. “The project willpay for itself even if the demand is only half the projected level.” Cindy Morgan (corporate controller)believes that the cost of capital should be 15% because of the declining demand for SparkPlug products.Required1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 12%? Use thebuilt-in NPV function in Excel; round your answer to the nearest whole dollar. 2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 15%? Use thebuilt-in NPV function in Excel; round your answer to the nearest whole dollar.
Risk and NPV; Sensitivity Analysis J. Morgan of SparkPlug Inc. has been approached to take
over a production facility from B.R. Machine Company. The acquisition will cost $1,500,000, and
the after-tax net
SparkPlug currently uses 12% for its after-tax cost of capital. Tom Morgan, production manager,
is very much in favor of the investment. He argues that the total after-tax net cash inflow is more than
the cost of the investment, even if the demand for the product is somewhat uncertain. “The project will
pay for itself even if the demand is only half the projected level.” Cindy Morgan (corporate controller)
believes that the cost of capital should be 15% because of the declining demand for SparkPlug products.
Required
1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 12%? Use the
built-in NPV function in Excel; round your answer to the nearest whole dollar.
2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 15%? Use the
built-in NPV function in Excel; round your answer to the nearest whole dollar.
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