DJK is taking a gander at 4 tasks, each one costing $450,000: Task Q is evaluate
ID: 2632456 • Letter: D
Question
DJK is taking a gander at 4 tasks, each one costing $450,000: Task Q is evaluated to create net profits of $120,000 for every year for 5 years; Task R is assessed to produce working wage of $90,000 for 6 years in addition to spare an extra $10,000 for every year; Task S is evaluated to spare $75,000 for every year for 10 years however requires extra corporate overhead of $10,000 for every year. Task T will expand income by $60,000 for 10 years, in addition to spare $25,000 for every year of working costs for the first 3 years only. PLEASE SHOW HOW YOU ARRIVED AT ANSWER.....
- Compute the net money streams for the 4 activities and pick all that will meet your choice standard at a corporate expense of capital of 8.0 %. Disregard corporate salary charge.
- What changes if the expense of capital tumbles to 10.0%? Overlook corporate wage charges.
- If we deduct pay expenses of 30% of the net money stream, does this change the results?
- Why would we pick any task with a NPV of 0?
Explanation / Answer
net money streams:
Q = pv of cash inflows-cash outflows
= 120000 x pviaf@ 8% for 5 years - 450000
= 120000 x 3.993 - 450000
= 29160
R= net cash inflows = 90000-10000=80000
net money streams= 80000 x pviaf@8% for 6 years - 450000
= 80000 x 4.623 - 450000
= -80160
S =( 75000-10000) x pviaf@8% for 10 years - 450000
= 65000 x 6.710 - 450000
= -13850
T = for first 3 years net cash inflow= 60000-25000= 35000
for next 7 years net cash inflows= 60000
pv of cash inflows for first 3 years = 35000 x 2.577
= 90195
pv of cash inflows for first 7 years = 60000 x (6.710-2.577)
= 247980
total pv of cash inflows = 247980+90195= 338175
net money streams = 338175-450000=-111825
hence only Q has possitive net money streams so it should be selected.
If expense of capital tumbles to 10% cost will be405000
both p and s can be selected as they will have possitive net money stream
30% pay
The decision will not change as the deduction is common for ALL options
When NPV =0
According to rule of npv a project having npv=0 or greater than 0 can be selected. if NPV= 0 it means the cash inflows and outflows are same . hence the project is meeting the mininmum cost of capital a firm should bear.
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