Net Present Value Use Exhibit 128.1 and Exhibit 128.2. Each of the following sce

Question

Net Present Value Use Exhibit 128.1 and Exhibit 128.2. Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,700,000 and will last 10 years. owning her own shop will be $52,500 per year. She estimates that the shop will have a useful life of 6 years. return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $270,000. She estimates that the return from c. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of Required:

Explanation / Answer

Req a: Campbell NPV: Annual cash benefit: 480000 Annuity factor (i=12% n=10) 5.65 Present value of inflows 2712000 Less: Initial Investment 2,700,000 NPV 12,000 Yes, The Investment in Welding machine shall be made Req b: Annuall return from Shop 52500 Annuity factor (i=8%, n=6) 4.623 Present Value of inflows 242707.5 Less: Initial Investment 270,000 NPV -27,293 No, Investment shall not be made Annuall return from Shop 135000 Annuity factor (i=8%, n=6) 4.623 Present Value of inflows 624105 Less: Initial Investment 270,000 NPV 354,105 The Shop shall be purchased. This reveals that decision to accept or reject in this case is affected by difference in expected returns. Req c: Annual Cash inflows 135000 Annuity factor (i=10%, n=8 years) 5.335 Present value of inflows 720225 Less: Net present value 63900 Initial Investment required 656325

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