Question :
45) Discounted cash flow methods focus operating income.
46) The : 1217114
45) Discounted cash flow methods focus on operating income.
46) The three common discounted cash flow methods are net present value, internal rate of return, and payback.
47) The net present value (NPV) method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.
48) Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
49) A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.
50) The net present value method can be used in situations where the required rate of return varies over the life of the project.
51) The net present value method accurately assumes that project cash flows can only be reinvested at the company’s required rate of return.
52) The Zero Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $41,920 and has predicted cash inflows of $10,000 per year for 10 years. It will have no salvage value.
Required:
a.Using a required rate of return of 16%, determine the net present value of the investment proposal.
b.Determine the proposal’s internal rate of return.
53) Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered.
Required:
a.If the company has a required rate of return of 14%, what is the net present value of the proposed investment?
b.What is the internal rate of return?
Answer:
a.
Predicted
Cash Flows
Year(s)
PV Factor
PV of Cash Flows
Initial investment
$(95,000)
0
1.000
$(95,000)
Annual operations, net
18,000
1-8
4.639
83,502
Salvage value, work cap
14,500
8
0.351
5,090
Net present value
$(6,408)
b.Trial and error is necessary. You know it is below 14% because the answer to Part A was negative and, therefore, less than the discount rate. Therefore, let’s try 12%.
Predicted
Cash Flows
Year(s)
PV Factor
PV of Cash Flows
Initial investment
$(95,000)
0
1.000
$(95,000)
Annual operations, net
18,000
1-8
4.968
89,424
Salvage value, work cap
14,500
8
0.404
5,858
Net present value
$282
The (almost) zero net present value indicates an internal rate of return of approximately 12%.
54) EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows:
Current Machine
New Machine
Purchase Price, New
$80,000
$100,000
Current book value
30,000
Overhaul needed now
40,000
Annual cash operating costs
70,000
40,000
Current salvage value
20,000
Salvage value in five years
5,000
20,000
Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes.
0
combs
