Page 423, P10-6, NPV for varying cost of capital (33 points) NPV for varying cos
ID: 2810831 • Letter: P
Question
Page 423, P10-6, NPV for varying cost of capital (33 points)
NPV for varying costs of capital Dane Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $24,000 and will generate after-tax cash inflows of $5,000 per year for 8 years. For each of the costs of capital listed, (1) calculate the net present value (NPV), (2) indicate whether to accept or reject the machine and (3) explain your decision.
a. The cost of capital is 10%.
b. The cost of capital is 12%.
C. The cost of capital is 14%.
Calculator of Table A-4 Calculate net present value, indicate whether to accept or reject, why?
a. 10% N = 8, I = 10%, PMT = $5000 Pv = PMT x (PVIFAi%, n) Pv = Pv = NPV = Pv - Initial investment NPV = NPV = Accept or reject; why? __________________________________
b. 12% N = 8, I = 12%, PMT = $5,000 Pv = PMT x (PVIFAi%, n) Pv = Pv = NPV = PV - Initial investment NPV = NPV = NPV = Accept or reject, why? ________________________________________________
C. 14% N = 8, I = 14%, PMT = $5,000 Pv = PMT x (PVIFAi%, n) Pv = Pv = NPV = PV - Initial investment NPV = NPV = NPV = Accept or reject, why? ___________
Explanation / Answer
Req a: Cost of capital 10% Annual cash inflows 5000 Annuity PVF at 10% for 8 yrs 5.33493 Present value of inflows 26674.65 Less: Initial investment 24000 NPV 2674.65 the project must be accepted Req b: Cost of capital 12% Annual cash inflows 5000 Annuity PVF at 12% for 8 yrs 4.96764 Present value of inflows 24838.2 Less: Initial investment 24000 NPV 838.2 the project must be accepted Req c: Req b: Cost of capital 14% Annual cash inflows 5000 Annuity PVF at 12% for 8 yrs 4.63886 Present value of inflows 23194.3 Less: Initial investment 24000 NPV -805.7 the project must be rejected
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