NPV; Sensitivity Analysis Griffey & Son operates a plant in Cincinnati and is co

Question

NPV; Sensitivity Analysis   Griffey & Son operates a plant in Cincinnati and is considering opening a new facility in Seattle. The initial outlay will be $3,500,000 and should produce after-tax net cash inflows of $600,000 per year for 15 years. Due to the effects of the ocean air in Seattle, however, the plant’s useful life may be only 12 years. Cost of capital is 14%.

Required

Based on an NPV analysis, should the project be accepted if a 15-year useful life is assumed? What if a 12-year useful life is used?

How many years will be needed for the Seattle facility to earn at least a 14% return?

Explanation / Answer

1)Present value =Cash inflow *PVAF@14%,15

                       = 600,000 * 6.14217

                        = $ 3685300.79

NPV = 3685300.79 - 3500000 = $ 185300.79

Yes ,project should be accepted as NPV is positive.

2)Present value =PVAF@14%,12 * CF

                 = 5.66029 * 600000

                = $ 3396175.28

NPV = 3396175.28 - 3500000 = $ - 103824.72

3) AT 14% ,12 years ,Present value = 3396175.28     ,Additional NPV required = - 103824.72

    At 14%, 13 years ,Present value of cash flow of year 13 = .182069 *600000 = 109241.63

Discounted payback period =Year up to which NPV is negative +(Negative NPV /Discounted cash flow of next year)

                = 12 + (103824.72 /109241.63)

                = 12 + .95

                = 12.95 years

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.