RWE Enterprises, Inc. (RWE) is a small manufacturing firm located in the hills j
ID: 2648409 • Letter: R
Question
RWE Enterprises, Inc. (RWE) is a small manufacturing firm located in the hills just outside of Nashville, TN. The firm is engaged in the manufacture and sale of feed supplements used by cattle raisers. The product has a molasses base but is supplemented with minerals and vitamins that are generally thought to be essential to the health and growth of beef cattle. The final product is put in 125-pound or 200-pound tubs that are then made available for the cattle to lick as desired. The material in the tub becomes very hard, which limits the animals
Explanation / Answer
(a) The net present value is the present value of all revnues minus present value of all cost.
Discount value = (1+i)-years=(1+0.1)-years
Cash flow present value = cash flow x discount value
The net present value of all cash flow is = 136462.986
(b) Internal rate of return is 1%.
This is the rate where the net present value of all cash flow equals zero.
3000000+1300000(1+i)-5 =700000(1+i)-1+700000(1+i)-2+700000(1+i)-3+700000(1+i)-4+700000(1+i)-6+
700000(1+i)-7+700000(1+i)-8+700000(1+i)-9+900000(1+i)-10
i = 1%
The profitability index = net value of all cash flow except initital investment / initial investment
=
3136462.99/3000000
=1.0454
The project is profitable. However the internal rate of return(1%) is lower than the discount value(10%). If discount value is the minimum rate of return expected then this project shuld not be undertaken.
(c) Pay back period is the year when positivecumulative cash flow starts .
Pay back period starts from 8th year
8th year + last negative cumulative cash flow/cash flow of preceeding year
= 8+(100000/700000)
= 8.142years
Discounted pay back perod starts in 10th year.
10th year + last negative cumulative cash flow/cash flow of preceeding year
10+(210525.97/346988.96)
10.606 years
Year Discount value Cash flow Cash flow present value 0 -3000000 -3000000.00 1 0.909090909 700000 636363.64 2 0.826446281 700000 578512.40 3 0.751314801 700000 525920.36 4 0.683013455 700000 478109.42 5 0.620921323 -1300000 -807197.72 6 0.56447393 700000 395131.75 7 0.513158118 700000 359210.68 8 0.46650738 700000 326555.17 9 0.424097618 700000 296868.33 10 0.385543289 900000 346988.96 Total 136462.986Related Questions
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