Each of the following scenarios is independent. Assume that all cash flows are after- tax cash flows.
a. Southward Manufacturing is considering the purchase of a new welding system. The cash benefits will be $ 400,000 per year. The system costs $ 2,250,000 and will last 10 years.
b. Kaylin Day is interested in investing in a women’s specialty shop. The cost of the investment is $ 180,000. She estimates that the return from owning her own shop will be $ 35,000 per year. She estimates that the shop will have a useful life of six years.
c. Goates Company calculated the NPV of a project and found it to be $ 21,300. The project’s life was estimated to be eight years. The required rate of return used for the NPV calculation was 10 percent. The project was expected to produce annual after- tax cash flows of $ 45,000.
1. Compute the NPV for Southward Manufacturing, assuming a discount rate of 12 percent. Should the company buy the new welding system?
2. Assuming a required rate of return of 8 percent, calculate the NPV for Kaylin Day’s investment. Should she invest? What if the estimated return was $ 45,000 per year? Would this affect the decision? What does this tell you about your analysis?
3. What was the required investment for Goates Company’s project?