(Ignore income taxes in this problem.) Murdock Company has a chance to make and
ID: 2343984 • Letter: #
Question
(Ignore income taxes in this problem.) Murdock Company has a chance to make and sell a new plastic five-gallon container. The company estimates that the net cash flows (sales less cash operating expenses) arising from manufacture and sale of the new container would be as follows (numbers in parentheses indicate an outflow):
Years
1-10
$ 85,000
Year
11
$(20,000)
Year
12
$ 95,000
Murdock would need to purchase production equipment costing $200,000 now to use in the manufacture of the new containers. This equipment would have a 12-year life and a $20,000 salvage value. Murdock Company's required rate of return is 12%.
The net present value of all cash flows associated with this investment (rounded to the nearest thousand dollars) is: A) $304,000
B) $380,000
C) $318,000
D) $298,000
Explanation / Answer
If you can use the BAII Plus calculator from Texas Instruments, you can find the answer right away. The answer is A) The explanantion as follows:
Net present value of cash flows
85,000/(1.12) + 85,000/(1.12)^2 + 85,000/(1.12)^3 + 85,000/(1.12)^4 + 85,000/(1.12)^5 + 85,000/(1.12)^6 + 85,000/(1.12)^7 + 85,000/(1.12)^8 + 85,000/(1.12)^9 + 85,000/(1.12)^10 - 20,000/(1.12)^11 + (95,000 + 20,000(salvage))/(1.12)^12 - 200,000(equipment) = 304,037.07
Another way of showing the answer is the following:
85,000*[1-(1/(1.12)^10)]/0.12 - 20,000/(1.12)^11 + (95,000 + 20,000(salvage))/(1.12)^12 - 200,000(equipment) = 304,037.07
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