Momi\'s cost of capital Assume straight line depreciation method is used Require
ID: 2589986 • Letter: M
Question
Momi's cost of capital Assume straight line depreciation method is used Required: 1. Cakculate the project's net presont value. Esture Value ot S1. Present Value of $1. Esture Value Annuity ot $1.Present Vabus Anmuity .ot $1) (Use appropriate factors) rom the tables prevides Do not round intermediate caleulations. Round the final answer to nearest whale dollar 2. Wihout making any cakaulations, determine whether the internal rate of reRp) s more cr lons than t percent O Less than 8 Percent Greater than 8 Percent alueAnn tus SL) (Use appropriate tacio s- 3. Calculate the net present walue using a 10 percent discourt 'ate (EuhitValueg S. Present w an o LEMtur yakm nnuta ats .ensen the tables provided. Do not round intermediate ealculations. Round the final answer to nearest whole dollar)Explanation / Answer
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Annual depreciation = (Cost of asset – salvage value)/life of asset
= (2400000 – 180000)/8
= 2220000/8
= 277500
To find the annual operating cash inflow the depreciation should be added back in the net income
Operating cash inflow = 170000 + 277500 = 447500
Now we can calculate NPV.
NPV is the difference between present value of all cash inflow and initial cost of asset or project.
All the future cash flows are discounted using discounting rate or required rate and the sum of all the discounted cash flows will be subtracted with initial cost.
NPV = PV of future cash inflow - initial cost
Pls refer below table for NPV calculation,
Year
Cash Inflow
PV factor
PV of cash flow
1
477500
0.9259
442129.6296
2
477500
0.8573
409379.2867
3
477500
0.7938
379054.8951
4
477500
0.7350
350976.7547
5
477500
0.6806
324978.4766
6
477500
0.6302
300905.9968
7
477500
0.5834
278616.6637
8
477500
0.5402
257978.3923
8
180000
0.5402
97248.39921
Total
2841268.495
Initial cost
2400000
NPV
441268.5
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The IRR will be greater than 8%, because IRR is the rate at which NPV becomes zero however NPV is still positive.
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If the discount rate is 10%
Year
Cash Inflow
PV factor
PV of cash flow
1
477500
0.90909
434090.9091
2
477500
0.82645
394628.0992
3
477500
0.75131
358752.8174
4
477500
0.68301
326138.9249
5
477500
0.62092
296489.9318
6
477500
0.56447
269536.3016
7
477500
0.51316
245033.0015
8
477500
0.46651
222757.2741
8
180000
0.46651
83971.32844
Total
2631398.588
Initial cost
2400000
NPV
231398.6
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Hope this answer your query.
Feel free to comment if you need further assistance. J
Year
Cash Inflow
PV factor
PV of cash flow
1
477500
0.9259
442129.6296
2
477500
0.8573
409379.2867
3
477500
0.7938
379054.8951
4
477500
0.7350
350976.7547
5
477500
0.6806
324978.4766
6
477500
0.6302
300905.9968
7
477500
0.5834
278616.6637
8
477500
0.5402
257978.3923
8
180000
0.5402
97248.39921
Total
2841268.495
Initial cost
2400000
NPV
441268.5
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