ACG 2071 %u2013 Comprehensive Problem IV When submitting the completed project,
ID: 2375926 • Letter: A
Question
ACG 2071 %u2013 Comprehensive Problem IV
When submitting the completed project, please show all work and number each answer accordingly.
When calculating the NPV use the following five columns (use for ALL NPV calculations):
Item
Year(s)
Cash Flow
Discount Factor
Present Value of Cash Flows
1. Tony Skateboards is considering building a new plant. James Bott, the company%u2019s marketing manager, is an enthusiastic supporter of the new plant. Michele Martinez, the company%u2019s chief financial officer, is not so sure that the plant is a good idea. Currently the company purchases its skateboards from foreign manufacturers. The following figures ere estimated regarding the construction of the new plant.
Cost of plant
$4,000,000.00
Estimated useful life
15 years
Annual cash inflows
$4,000,000.00
Salvage value
$2,000,000.00
Annual cash outflows
$3,550,000.00
Discount rate
11%
James Bott believes that these figures understate the true potential value of the plant. He suggests that by manufacturing its own skateboards the company will benefit from a %u201Cbuy American%u201D patriotism that he believes is common among skateboarders. He also notes that the firm has had numerous quality control problems with the skateboards manufactured by its suppliers. He suggests that the inconsistent quality has resulted in lost sales, increased warranty claims, and some costly lawsuits. Overall, he believes sales will be $200,000 higher than the projected above, and that the savings from lower warranty costs and legal costs will be $80,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.
Required:
a. Compute the Cash Payback period for the project based on the original projections.
b. Compute the net present value of the project based on the original projections.
c. Compute the net present value of the project incorporating James%u2019 estimates of the value of the intangible benefits, but still using the 11% discount rate.
d. Compute the Cash Payback period for the project incorporating James%u2019 estimates of the value of the intangible benefits.
e. Compute the net present value of the project incorporating James%u2019 estimates of the value of the intangible benefits, but employing the 9% discount rate.
f. Comment on your findings.
2. The partnership of Michele and Mark is considering the following long-term capital investment proposal. Relevant data on the project is listed below. Salvage value is expected to be zero for the project. Depreciation is computed by the straight-line method. The company%u2019s rate of return is the company%u2019s cost of capital which 12%.
Brown
Capital Investment
$200,000.00
Annual Net Income:
Year 1
$25,000.00
Year 2
$16,000.00
Year 3
$13,000.00
Year 4
$10,000.00
Year 5
$8,000.00
Total
$72,000.00
Required:
a. Compute the cash payback period for the project. (round to two decimal places)
b. Compute the net present value for the project (round to the nearest dollar)
c. Compute the annual rate of return for the project.
d. Compute the profitability index for the project.
Item
Year(s)
Cash Flow
Discount Factor
Present Value of Cash Flows
Explanation / Answer
cash flow PV of discount factor prsent value
450000 7.19 3235500
2000000 .209 418000
total cash flow 3653500
NPV=3653500-4000000=-346500
payback=8 year+[(4000000-3600000)/450000]*12
=8 year 10.67 months
cash flow= 730000*7.19=5248700
2000000*0.209= 418000
total cash flow=5666700
NPV= 5666700-4000000=1666700
payback = 5year+[(4000000-3650000)/730000]*12
=5 year 5.75 month
e. cash flow = 730000*8.06=5883800
pv of salvage value= 548000
total cash flow=6431800
NPV= 6431800-4000000=2431800
2. 25000 0.893 22325
16000 0.797 12752
13000 0.712 9256
10000 0.635 6350
8000 0.567 4536
total cash flow 55219
NPV= 55219-200000=-144781
payback = unidentified
ARR=14400/40000)*100=36%
PI= 55219/200000=0.276
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.