MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
15th Edition
ISBN: 9780134479903
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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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
Expert Solution & Answer
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
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Students have asked these similar questions
Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,600, has a five-year life, and has no residual value after five years.
The company's cost of capital is 10.99%. 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 across the three scenarios. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Year
Pessimistic
1
$6,720
2
7,310
8,730
4
7,850
5
5,840
$9,320
13,270
ITTI
Expected cash inflows
Most likely
Optimistic
$11,750
10,320
11,680
10,720
15,830
12,780
7,730
8,820
For the pessimistic scenario, the NPV is $
(Round to the nearest cent.)
A management company is considering purchasing a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the 5 years of the machine's useful life, it will be zero salvage value.
The company requires a rate of return of 12%.
1. Determine the net present value of the investment of the machine?
2.What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
JBL Inc. is considering a new product that would require an after-tax investment of $1,400,000 at t
= 0. If the new product is well received, then the project would produce after-tax cash flows of $
650,000 at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product,
then the cash flows would be only $100,000 per year. There is a 70% probability that the market will be
good. JBL Inc. could delay the project for a year while it conducted a test to determine if demand would
be strong or weak. The project's cost and expected annual cash flows are the same whether the project is
delayed or not; however, the timing of the cash flows would change. (There would be the same number
of cash flows-only the cash flows would be extended out one extra year.) The project's WACC is 10%.
What is the value of the project after considering the investment timing option? a. $108, 226.89 b. $
137, 743.32 c. $167, 259.75 d. $196, 776.18 e. $216, 453.79
Chapter 12 Solutions
MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
Ch. 12.1 - Are most mutually exclusive capital budgeting...Ch. 12.2 - Prob. 12.2RQCh. 12.2 - Describe how each of the following behavioral...Ch. 12.3 - Briefly explain how the following items affect the...Ch. 12.4 - Describe the basic procedures involved in using...Ch. 12.4 - Explain why a firm whose stock is actively traded...Ch. 12.4 - Prob. 12.8RQCh. 12.5 - Explain why a mere comparison of the NPVs of...Ch. 12.5 - What are real options? What are some major types...Ch. 12.5 - What is the difference between the strategic NPV...
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