Santa Ana, Inc. has a 6% cost of capital. The firm decides to invest in equipment that costs $250,000. Santa Ana, Inc. forecasts that the project will generate $33,000 of annual cash inflow in each of the next eleven years. (Note that the present value for i = 6% and n = 10 is 7.36009 and for i = 6% and n = 11 is 7.8887.) Required: Using Excel formulas, compute the project’s net present value (NPV) and internal rate of return (IRR). State the reason why Santa Ana, Inc. should or should not make the investment. Use sensitivity analysis to determine: The maximum hurdle rate that could exist before Santa Ana, Inc. rejects the investment. The minimum annual cash flow that Santa Ana could generate and still invest in the project. The minimum number of years that Santa Ana could generate a $33,000 annuity and still invest in the project.
Santa Ana, Inc. has a 6% cost of capital. The firm decides to invest in equipment that costs $250,000. Santa Ana, Inc. forecasts that the project will generate $33,000 of annual cash inflow in each of the next eleven years. (Note that the present value for i = 6% and n = 10 is 7.36009 and for i = 6% and n = 11 is 7.8887.) Required: Using Excel formulas, compute the project’s net present value (NPV) and internal rate of return (IRR). State the reason why Santa Ana, Inc. should or should not make the investment. Use sensitivity analysis to determine: The maximum hurdle rate that could exist before Santa Ana, Inc. rejects the investment. The minimum annual cash flow that Santa Ana could generate and still invest in the project. The minimum number of years that Santa Ana could generate a $33,000 annuity and still invest in the project.
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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Problem 4–3 (Advanced Topics—Sensitivity Analysis)
Santa Ana, Inc. has a 6% cost of capital. The firm decides to invest in equipment that costs $250,000. Santa Ana, Inc.
(Note that the
Required:
- Using Excel formulas, compute the project’s
net present value (NPV) andinternal rate of return (IRR). - State the reason why Santa Ana, Inc. should or should not make the investment.
- Use sensitivity analysis to determine:
- The maximum hurdle rate that could exist before Santa Ana, Inc. rejects the investment.
- The minimum annual cash flow that Santa Ana could generate and still invest in the project.
- The minimum number of years that Santa Ana could generate a $33,000
annuity and still invest in the project.
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