From the scenario for Katrina’s Candies, suggest one (1) method in which Herb co
ID: 2728348 • Letter: F
Question
From the scenario for Katrina’s Candies, suggest one (1) method in which Herb could use a cost-benefit analysis to argue for or against an expansion. Create three (3) optimal decision rules for Katrina’s Candies (e.g., whether to hire more staff or hire temporary workers to meet production schedules). Assess both the short-term and the long-term costs and benefits of obtaining a graduate degree. Support your decision to obtain a graduate degree with a cost-benefit analysis of your particular situation. (Optional - can substitute for one of the above) : Calculate the IRR and NPV for the following capital project: The initial outlay is $700,000.00. The Net Cash Flow is constant at $118,861.00 for 10 years. The salvage value is zero. The required rate of return or discount rate is 9%. Is this capital project worthy of consideration?
Explanation / Answer
NPV (Net Present Value) = P.V. of cash inflow - P.V. of cash outflow
i) P.V. of cash inflow = 118861 * Cumulative P.V. factor for 10 Years @ 9 %
= 118861 * 6.418 (approx)
= 762850 (approx)
ii) P.V. of Cash outflow = 700000 (Given in Question)
Therefore, NPV = 762850 - 700000 = $ 62850 (approx)
Conclusion: As the NPV of project is positive, thus, project should be acceptable. In other words, project is very worthy of consideration.
Caculation of IRR
Take two trial rate. One rate where P.V. of cash inflow is greater than the P.V. of cash outflow and vice-versa.
At 9 %
P.V. of cash inflow = $ 762850 (approx)
At 14 %
P.V. of cash inflow = 118861 * Cumulative P.V. factor for 10 Years @ 14 %
= 118861 * 5.216 = $ 619979 (approx)
IRR (By inter-polation); = 9 + (762850 - 700000) * (14 - 9) / (762850 - 619979)
= 9 + 62850 * 5 / 142871
= 9 + 314250 / 142871
= 9 + 2.20 (approx)
= 11.20 %
Conclusion: IRR = 11.20 %
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