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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
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
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