Xespresso is launching a new type of espresso coffee machine. Production requires an initial investment of £85m in year zero. The project is expected to last 5 years, after which the new machine is expected to become obsolete and production will be discontinued. £10m are expected to be recovered in year 5 by selling production facilities. Sales of the new machine are expected to be worth £30m in each of years 1-5. Operating costs will be £10m per year in each of years 1-5. The company is expecting to accumulate an inventory equal to 10% of sales in year 1, which will be maintained throughout years 1-4 and then sold in year 5. Assume for simplicity that there are no taxes and all cash flows (including working capital investments) occur at the end of the year. a. Determine the project's NPV using a 10% discount factor. Should the company undertake this project? b. Assume that the company has a beta equal to 2 and a debt to equity ratio equal to one. The risk free rate is 4% and the market risk premium is 6%. Determine the NPV of the project when the company's debt is risk free. Should the company undertake the project given the new data?

Xespresso is launching a new type of espresso coffee machine. Production requires an initial investment of £85m in year zero. The project is expected to last 5 years, after which the new machine is expected to become obsolete and production will be discontinued. £10m are expected to be recovered in year 5 by selling production facilities. Sales of the new machine are expected to be worth £30m in each of years 1-5. Operating costs will be £10m per year in each of years 1-5. The company is expecting to accumulate an inventory equal to 10% of sales in year 1, which will be maintained throughout years 1-4 and then sold in year 5. Assume for simplicity that there are no taxes and all cash flows (including working capital investments) occur at the end of the year. a. Determine the project's NPV using a 10% discount factor. Should the company undertake this project? b. Assume that the company has a beta equal to 2 and a debt to equity ratio equal to one. The risk free rate is 4% and the market risk premium is 6%. Determine the NPV of the project when the company's debt is risk free. Should the company undertake the project given the new data?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: Q16. Lesco Chemical is considering two processes for making a cationic polymer. Process A has a…

A: The first cost of process A = $110000 The annual operating cost of process A = $58000 The first cost…

Q: a) Calculate the net present value for both projects. Answer to the nearest cent b) Find the…

A: To determine the net present value, we need to discount each cash flow to PV using the formula…

Q: J&M Corporation purchased a vibratory finishing machine for $20,000 in year 0. The useful life of…

A: In economics, an expense refers to the cost incurred by a firm or individual when purchasing goods…

Q: 1)What is the IRR for a $1000 investment that returns $200 at the end of 100 years?

A: Since you have posted multiple questions, we will provide the solution only to the first question as…

Q: Determine the IRR for an equipment that costs $250,000 and would provide positive cash flows of…

A: Cash flow:The sum of the total money is represented in the diagram. It represents the magnitude and…

Q: For the net cash flow (NCF) shown below, find the EROR by the Modified ROR Approach (MIRR) method if…

Q: Please provide steps by step answer with proper calculation with final answer......

Q: A cookie company wants to expand its retail operations. Based on a preliminary study, 10 stores are…

A: Step 1: Given Value for Calculation Cash Flow = cf = $150Time = t = 5 YearsInitial Investment = i =…

Q: How much must you deposit each year into your retirement account starting now and continuing through…

A: The deposit made continues for 10 years. The amount to be withdrawn is $85000 every year. The time…

Q: Jay is renting out a piece of equipment, from which he generates an income of $120,000 per year. The…

A: First Cost = 800,000 Annual Income = 120,000 Gradient (G) after year 1 = 5000

Q: Sean Bell invested $10,000 in a blue chip stock five years ago and paid a commission of $90. He sold…

A: None of these.Explanation:Sean invested $10,000 in a blue chip stock and paid a commission of $90,…

Q: compute the present worth using a 10% per annum compounded continuously rate.

A: Present worth gets used to determine the current value of a future income stream.

Q: You are considering an apartment building project that requires an investment of $15, 000, 000. This…

A: Given information Initial investment=$15000000 The building has 30 units Maintenance cost per…

Q: You are considering a large CNC equipment purchase. You will need an initial deposit of $165,000.…

Q: A grocery store is considering the purchase of a new refrigeration unit with an Initial Investment…

A: Payback Period:The payback period is the period in which the project recovers its initial cost of…

Q: How much must you deposit each year into your retirement account starting now and continuing through…

A: A deposit starting from current period goes through 10 years. The deposit takes place if $75000…

Q: 4) Compute the equivalent annual worth of an investment alternative that has an annuity of $2,000…

A: Equivalent annual worth refers to the uniform yearly cash flow equivalent to the present value of an…

Q: Question 5 The second, Van Y, has a useful life of 10 years and will cost you $33,000 in Year 0. You…

A: Part 2: Explanation:Step 1: Calculate the total revenue generated by Van Y over its useful life. -…

Q: A new computer network system is being considered for an organization. The initial cost of the…

A: Present value is the value of investment in today's dollar. Future value is the value of investment…

Q: A company owns a fleet of trucks and operates its own maintenance shop. A particular type of truck,…

Q: A contractor is considering whether to buy or lease a new machine for her layout site work. Buying a…

A: First, we need to calculate the Net Present Value (NPV) for the buying option. The NPV is the sum of…

Question

Xespresso is launching a new type of espresso coffee machine. Production requires an initial
investment of £85m in year zero. The project is expected to last 5 years, after which the new
machine is expected to become obsolete and production will be discontinued. £10m are expected to
be recovered in year 5 by selling production facilities. Sales of the new machine are expected to be
worth £30m in each of years 1-5. Operating costs will be £10m per year in each of years 1-5. The
company is expecting to accumulate an inventory equal to 10% of sales in year 1, which will be
maintained throughout years 1-4 and then sold in year 5. Assume for simplicity that there are no
taxes and all cash flows (including working capital investments) occur at the end of the year.
a. Determine the project's NPV using a 10% discount factor. Should the company undertake this
project?
b. Assume that the company has a beta equal to 2 and a debt to equity ratio equal to one. The
risk free rate is 4% and the market risk premium is 6%. Determine the NPV of the project
when the company's debt is risk free. Should the company undertake the project given the
new data?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Analysing NPV

VIEW

Solution

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Please answer question 4 with details on how to do it. Thank you.
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)?
You are considering a large commercial property purchase. You will need an initial deposit of $100,000. The annual revenues for the property are expected to be $15,000 starting in year 1. Annual operating and maintenance costs are expected to be $8,000 every year starting in year 1. The property is expected to last for 30 years. What is the ROR?
A new baseball stadium is being considered to be built in a metropolitan area by High Tech, Inc., at a cost of $50M. It is estimated that the annual maintenance cost will be $100K. The construction company recommends a major renovation every 50 years at a cost of $10M. If the corporation wants to set up a trust fund to pay for the stadium, its maintenance, and periodic renovations for an undefined number of years to come, what amount should be invested in the trust fund if the fun earns an annual interest rate of 6%? Group of answer choices $52,223,000 $60,566,667 $60,666,667 $73,500,429 $58,600,000
Your firm is thinking about investing $300,000 in the overhaul of a manufacturing cell in a lean environment. Revenues are expected to be $39,000 in year one and then increasing by $13,000 more each year thereafter, Relevant expenses will be $20,000 in year one and will increase by $10,000 per year until the end of the cell's nine-year life. Salvage recovery at the end of year nine is estimated to be $10,000. What is the annual equivalent worth of the manufacturing cell if the MARR is 10% per year? How sensitive is the annual worth to ± 10% changes in the MARR? Are changes in the MARR really a significant consideration in this problem? Click the icon to view the interest and annuity table for discrete compounding when the MARR is 9% per year. E Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 11% per year. Find Annual Equivalent…
What is the net present value and IRR on a project costing $1000, providing a net cash flow of $400 per year for 5 years, with a required rate of return of 5%:1 ) NPV-1731, IRR of approximately 18% 2) NPV- 334, IRR of approximately 11% 3) NPV 732, IRR of approximately 28%4) None of the above
If the interest rate is 4%, what is the approximate future value of $15,000 in 10 years? $15,900 $17,949 $10,133 $22,204