Net Present Value Analysis Hermson Company must evaluate two capital expenditure
ID: 2523446 • Letter: N
Question
Net Present Value Analysis
Hermson Company must evaluate two capital expenditure proposals. Hermson's cutoff rate is 12%. Data for the two proposals follow.
Using net present value analysis, which proposal is the more attractive?
Do not use negative signs with your answers. Round PV answers to the nearest whole number. Use rounded answers for subsequent calculation of net present value.
Explanation / Answer
Answer:
Proposal X:
Initial Outflows = $280,000
Annual After-Tax Cash Inflows = $66,000
PV of Future Cash Inflows = Annual After-Tax Cash Inflows * PVIFA (12%, 12)
PV of Future Cash Inflows = $66,000 * 6.1944
PV of Future Cash Inflows = $408,830
Net Present Value = PV of Cash Inflow – PV of Cash Outflows
Net Present Value = $408,830 - $280,000
Net Present Value = $128,830
Proposal Y:
Initial Outflows = $280,000
After-Tax Cash Inflows = $66,000
PV of Future Cash inflows = $66,000 * PVIF (12%, 3) + $66,000 * PVIF (12%, 6) + $66,000 * PVIF (12%, 9) + $66,000 * PVIF (12%, 12)
PV of Future Cash inflows = ($66,000 * 0.7118) + ($66,000 * 0.5066) + ($66,000 * 0.3606) + ($66,000 * 0.2567)
PV of Future Cash Inflows = $46,978.80 + $33,435.60 + $23,799.60 + $16,942.20
PV of Future Cash Inflows = $121,156
Net Present Value = PV of Cash Inflow – PV of Cash Outflows
Net Present Value = $121,156 - $280,000
Net Present Value = -$158,844
Proposal X
Proposal Y
Initial Outflows
$280,000
$280,000
PV of Future Cash Flows
$408,830
$121,156
Net Present Value
$128,830
-$158,844
Proposal X
Proposal Y
Initial Outflows
$280,000
$280,000
PV of Future Cash Flows
$408,830
$121,156
Net Present Value
$128,830
-$158,844
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