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1. Sunstar Company is considering purchasing the new farm that it plans to function for 10 years. The farm will need the initial investment of $12.00 million. This investment will consist of $2.00 million for land and $10.00 million for trucks and other equipment. Land, all trucks, and all other equipment is expected to be sold at ending of 10 years at the price of $5.01 million, $2.43 million above book value. Farm is expected to create revenue of $2.01 million each year, and annual cash flow from operations equals $1.82 million. Marginal tax rate is= 35%, and suitable discount rate is 9%. Compute NPV of this investment.

2. High Mountain Vineyards is considering updating its present manual accounting system with high-end electronic system. Whereas the latest accounting system would save company money, cost of the system continues to refuse. High Mountain’s opportunity cost of capital is 15.9%, and costs and values of investments made at various times in future are as given:

year/ cost/    Value of Future Savings (at time of purchase)
0     $5,000   $7,000
1      4,200     7,000
2      3,400     7,000
3      2,600     7,000
4      1,800     7,000
5      1,000     7,000

Computethe NPV of each choice.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914253

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