Chapter 12, Problem 12.1WUE

Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,000, has a 5-year life, and has no residual value at the end of the 5 years. The company's cost of capital is 10.87%. Known with less certainty are the actual after-tax cash inflows for each of the 5 years. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV given each scenario.

Summary Introduction

To discuss:

The B is considered as investment in the NK Machine, the machine requires the initial investment of the $27,000 of the five years life period and have the residual value of the five years and the capital cost is 10.87%, and the company’s estimated expected cash inflows haves scenarios such as pessimistic, most likely and optimistic. These values are present in the table below. Need to determine the net present value of the current situation.

Expected cash inflows
Year	Pessimistic ($)	Most likely ($)	Optimistic ($)
1	6,750	9,250	11,750
2	7,250	10,250	13,250
3	8,750	11,750	15,750
4	7,750	10,750	12,750
5	5,750	7,750	8,750

Introduction:

The net present value is the variation between present cash inflows values and outflow values for a time period. The net present is used the capital budgeting projects to analyse the profitability of the project

Explanation of Solution

Through the sensitivity analysis the twelve percent cost of capital to discount all of the cash flows for each scenarios yield to the following net present value ranges to $19,109.78.

The pessimistic value is -$3,283.48

The most likely value is -$6,516.99

The optimistic value is $15,826.30