1. Kingston, Inc. management is considering purchasing a new machine at a cost o

Question

1. Kingston, Inc. management is considering purchasing a new machine at a cost of $4,309,294. They expect this equipment to produce cash flows of $887,041, $870,440, $990,392, $1,060,034, $1,166,140, and $1,206,503 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

2. Hathaway, Inc., a resort company, is refurbishing one of its hotels at a cost of $7,626,080. Management expects that this will lead to additional cash flows of $1,823,447 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Hathway go ahead with this project? (Round answer to 2 decimal places, e.g. 5.25%.)

3. Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent.

Explanation / Answer

1. Kingston, Inc. management

We employ Net Present Value (NPV) Technique ( Because we bring all the future cash inflows to the present value and compare them )

NPV = Sum of Discounted Cash Inflows (--) Sum of Discounted Cash Outflows.
If, NPV is Positive Value = Accept the Project,
If, NPV is Negative Value = Reject the Project,

2. Hathaway, Inc., a resort company

At, IRR ( Internal Rate Of Return ), Sum of Discounted Cash Inflows will be equal to Sum Of Discounted Cash Outflows (i.e., at this percentage, we get breakeven point of the  investment )

IRR = Sum of Discounted Cash Inflows / Sum Of Discounted Cash Outflows

If, IRR is 1, then Accept the project,
If, IRR is Less than 1, do not accept the project.


Discounted Cash Inflows for 6 years will be $ 1,823,447 * (4.124 (i.e.,sum of discounting factors of 6 years @ 12%)) = $7,519,895. --- (a)
Then, Discounted cash outflows for 6 years will be $7,626,080 --- (b)

Then, IRR = (a) / (b) = $7,519,895/$7,626,080 = 0.986 ( i.e., less than 1, So do not Accept the project )



3. Turnbull Corp.

For this Company too, NPV Technique suites the best to evaluate and assess whether we can take up the project or not.

we apply the NPV Formula as expressly written above :

Year Cash Inflows (A) (in $) Discouting factor @15% (B) Discounted cash inflows (A*B) (in $) 1 887,041 0.87 771,725 2 870,440 0.76 661,534 3 990,392 0.66 653,658 4 1,060,034 0.57 604,219 5 1,166,140 0.50 583,070 6 1,206,503 0.43 518,796 SumOf Discounted Cash Inflows 3,793,002 0 4,309,294 Sum Of Discounted Cash Outflows (--)4,309,294 NPV (--)516,292 DECISION REJECT THE PROJECT NEGATIVE CASH FLOWS

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