Concept explainers
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
Want to see more full solutions like this?
Chapter 12 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
- 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, 453.79arrow_forwardThe Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first 3 years. Starting in Year 4, the project will produce cash flows of $721,000 for 3 years. The project is risky, so the firm has assigned it a discount rate of 17 percent. What is the project's net present value?arrow_forwardThe management of Kunkel Company is considering the purchase of a $34,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine's five-year useful life, it will have zero scrap value. The company's required rate of return is 12%. Use Excel or a financial calculator to solve. Required: 1. Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Round answers to the nearest dollar.) Net present value 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.) Total Cash Item Cash Flow Years Flows Annual cost savings Initial investment 1 Net cash flow %24 24arrow_forward
- Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $9.2 million for the next 8 years. The discount rate for this project is 13 percent for new product launches. The initial investment is $39.2 million. Assume that the project has no salvage value at the end of its economic life. a. What is the NPV of the new product? (Do not round intermediate calculations and After the first year, the project can be dismantled and sold for $26.2 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?arrow_forwardFeldman Corp. is considering a new product that would require an investment of $8 million at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $3.4 million 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 $1.85 million per year. There is a 65% probability that the market will be good. Foltz Corp. 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. $144,867.15 b. $269,039.00 c. $357,188.00 d. $413,906.15 e. $455,296.77arrow_forwardGreen & Company is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $15.7 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $10.7 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Green's controller has concluded that the operation will most probably result in annual savings of $7.9 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $3.7 million per year for each of years 4 through 7. The company uses a 12 percent discount rate. Use Exhibit A.8. Required: Compute the NPV under the three scenarios. Note: Round PV factor to 3…arrow_forward
- Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $8.1 million for the next 8 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $38.1 million. Assume that the project has no salvage value at the end of its economic life. a. What is the NPV of the new product? . B.After the first year, the project can be dismantled and sold for $25.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?arrow_forwardAlyeska Salmon Inc is considering a new automated production line project. The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. The firm’s management prefers using the modified IRR approach. The firm’s WACC is 12%. What’s the terminal value of after-tax annual cash flows for the new automated production line project? What is the project’s MIRR?arrow_forwardA firm has an investment proposal, requiring an outlay of 80,000. The investment proposal is expected to have two years economic life with no salvage value. In year 1, there is a 0.4 probability that cash inflow after tax will be 50,000 and 0.6 probability that cash inflow after tax will be 60,000. The probability assigned to cash inflow after tax for the year 2 is as follows: The cash inflow year 1 The cash inflow year 2 *24,000 *32,000 44,000 *50,000 Probability 0.2 0.3 0.5 40,000 €50,000 *60,000 *60,000 Probability 0.4 0.5 0.1 The firm uses a 10% discount rate for this type of investment. Required: (i) Construct a decision tree for the proposed investment project and calculate the expected net present value (NPV). (ii) What net present value will the project yield, if worst outcome is realized? What is the probability of occurrence of this NPV? (iii) What will be the best outcome and the probability of that occurrence? (iv) Will the project be accepted?arrow_forward
- Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. A) What is the NPV of the new product? B) After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?arrow_forwardJazz town, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?arrow_forwardYour firm is considering the purchase of two alternative machinery: Machine A has an expected life of 2 years, will cost Rs. 75 million, and will produce net cash flows of INR 45 million per year. Machine B has a life of 4 years, will cost INR 100 million, and will produce net cash flows of INR 33 million per year. Your firm plans to use the chosen machine for only 4 years. Inflation in operating costs, machinery costs, is expected to be zero, and the company’s cost of capital is 9%. Which machine is acceptable as the better project using replacement chain method? Will your choice hold if cost of A becomes INR 90 million for second year? What is the equivalent annual annuity cost for each machine and evaluating with this criterion, do you find any difference in your decision on the better machinery, when you had used replacement chain method?arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education