1. Questions

Finance

Question 1: You wish to start a project. Your initial investment is $100000. You generate 0 cash flows for the first 2 years but generate $16000 in year 3 and increase by 15% every year till year 7, after which time they decline by 2% until year 9. You expect 0 growth in cash flows beyond year 9, but expect to generate constant cash flows into the foreseeable future. If capital cost is 8% per year, find the NPV
ANSWER: Net Present Value=$168609.42

Question 2: You want to buy new machine and replace the existing machine, which you have used for the past 3 years. New machine costs $75000 and will be useful for 5 years after which can be sold to fetch salvage value of $9000. New machine will be depreciated straight-line to 0 over 5 years. Old machine was bought for $70000 and also depreciates straight-line to 0 over 5 years. Old machine can be sold today for $30000 but if you wait for 5 years, it will only worth $6500.
New machine is efficient. Annual savings in operating costs are $12000. Your net working capital requirement will decline annually by $4000. Tax rate is 35% and capital cost rate is 12%. Find the NPV
ANSWER: Net Present Value(replacing)=$9598.75

Please show me detailed step-by-step solutions. Thanks.

  1. 👍 0
  2. 👎 0
  3. 👁 341
A

  1. An excel spreadsheet is very handy for these types of analyses. I'll do the first one, which should give you a process for working the second.

    First calculate the net present value for the cash flows for years 0 to 10.
    0 = -100000/(1.08^0) = -100000
    1 = 0
    2 = 0
    3 = 16000/(1.08^3) =
    4 = (16000*1.15)/(1.08^4)
    ....
    9 = 26875.93/(1.08^9)
    10 = 26875.93/(1.08^10)

    Now then year 10's PV flows forever, but declining by 8% per year. With this infinite expansion, the multiplier is simply 1/.08 = 12.5

    So, years 11 and beyond = (PV in year 10)*12.5

    Sum the PV's for years 0 to 11+ and you should get 168609.42

    1. 👍 0
    2. 👎 0
    economyst

Respond to this Question

First Name

Your Response

Similar Questions

  1. Algebra

    Following the birth of a​ child, a parent wants to make an initial investment P 0 that will grow to ​$70,000 for the​ child's education at age 19. Interest is compounded continuously at 6​%. What should the initial

  2. Algebra

    A financier plans to invest up to $500,000 in two projects. Project A yields a return of 11% on the investment of x dollars, whereas Project B yields a return of 16% on the investment of y dollars. Because the investment in

  3. Pre-Calc

    An initial investment of $9000 grows at an annual interest rate of 5% compounded continuously. How long will it take to double the investment?

  4. Physics

    A Pratt and whitney PW4000 turbofan engine is able to provide a maximum thrust of 2.49 x 100000 N.A Boeing 747-400 airliner has four of these engines. If its mass is 2.72 x 100000 kg, what is its acceleration?

  1. Finance

    Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.38 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated

  2. compound interest

    How do I solve these problems? Complete the table for a savings account in which interest is compounded continuously. 1. Initial Investment: $1000 Annual % Rate: 3.5% Time to Double: ? Amount After 10 Years: ? 2. Initial

  3. finance

    Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1

  4. Business

    Assignment for week 5 Given the following information, draw the project network. Compute the early, late and slack times for the project network. which activities are on the critical path have only the start or finish of the

  1. exponential function

    An investment pays 8% interest, compounded annually. a) write an equation that expresses the amount, A, of the investment as a function of time, t, in years. b) determine how long it will take for this investment to double in

  2. Financial

    Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to

  3. Principles of Finance

    A five-year project has an initial fixed asset investment of $335,000, an initial NWC investment of $35,000, and an annual OCF of −$34,000. The fixed asset is fully depreciated over the life of the project and has no salvage

  4. Business Calculus

    Pam and Tim decide to start saving money for their daughter's college education. They open a college savings plan (529) with a 500 dollars initial investment and next month start to make monthly deposits of 120 dollars. If the

You can view more similar questions or ask a new question.