Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period.
The company's discount rate is 17%.
After careful study, Oakmont estimated the following costs and revenues for the new product:
Cost of equipment needed $ 240,000
Working capital needed $ 83,000
Overhaul of the equipment in two years $ 7,000
Salvage value of the equipment in four years $ 11,500
Annual revenues and costs:
Sales revenues $ 390,000
Variable expenses $ 190,000
Fixed out-of-pocket operating costs $ 84,000
When the project concludes in four years the working capital will be released for investment elsewhere within the company. view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Required:
Calculate the net present value of this investment opportunity. (Use the appropriate table to determine the discount factor(s).)
Exercise 11-5 Net Present Value Analysis of Two Alternatives [LO11-2] Perit Industries has $150,000 to invest. The company is trying to decide between two alternative uses of the funds.
The alternatives are:
Project A Project B Cost of equipment required $150,000 $0
Working capital investment required $0 $150,000
Annual cash inflows $24,000 $37,000
Salvage value of equipment in six years $8,500 $0
Life of the project 6 years 6 years
The working capital needed for project B will be released at the end of six years for investment elsewhere.
Perit Industries' discount rate is 15%.
view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Required:
a. Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign.
Use the appropriate table to determine the discount factor(s).) Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,510,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,900,000 Variable expenses 2,200,000 Contribution margin 2,700,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $850,000 Depreciation 1,102,000 Total fixed expenses 1,952,000 Net operating income $ 748,000 Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the project's net present value? (Use the appropriate table to determine the discount factor(s).)
2. What is the project's simple rate of return? (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)