Hathaway engines is a producer of mtor vehicle components. It is considering two

Question

Hathaway engines is a producer of mtor vehicle components. It is considering two seperate projects for implementation in 2008. The two projects have the same time lives of six years but ae entirly different in nature. Project Red looks at the viability of replacing an assembly machine, while the project gold considers an R&D project for a new type of business. The cash flows of the two projects are as follows:
Year Project Red Project Gold
0 -1000000 -5000000
1 450000 0
2 450000 0
3 350000 2000000
4 350000 2000000
5 250000 2500000
6 250000 2500000
the company's schedule for required rate of return associated with different classes is:
replacement decision 10%
modification or expansion of existing product line 13%
project unrelated to current operations 18%
R & D operations 22%
1. CALCULATE NPV FOR THE PROJECT RED AND PROJECT GOLD
2. NOTE ALL CALCULATIONS SHOULD BE DONE MANUALLY AND SHOULD BE EXPLAINED CLEARLY

Explanation / Answer

Project Red
________________________________________________
Year   Cash Flow      PV Factor 10%      Present Value
________________________________________________
0        -1,000,000          1.0000              -1,000,000
1            450,000          0.9091                  409,095
2            450,000          0.8264                  371,880
3            350,000         0.7513                  262,955
4            350,000          0.6830                  239,050
5            250,000          0.6209                  155,225
6            250,000          0.5645                  141,125
____________________________________________
           1,100,000                          NPV    579,330
____________________________________________
PV Factor Calculation
Year 1        1/1.1       = 0.9091
        2     .9091/1.1  = 0.8264
        3     .8264/1.1 = 0.7513
and so on

Project Gold
_______________________________________________
Year   Cash Flow      PV Factor 22%      Present Value
_______________________________________________
0        -5,000,000         1.0000              -5,000,000
1                      0          0.8197                           0
2                      0          0.6719                           0
3         2,000,000          0.5507              1,101,400
4         2,000,000          0.4514                 902,800
5         2,500,000          0.3700                 925,000
6         2,500,000          0.3033                 758,250
____________________________________________
           4,000,000                        NPV -1,312,550
____________________________________________

PV Factor Calculation
Year 1        1/1.22       = 0.8197
       2     .8197/1.22   = 0.6719
        3     .6719/1.22   = 0.5507
and so on

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