Chatman Company is considering two capital investments. Both investments have an initial cost of $ 5,000,000 and
Question:
Chatman Company is considering two capital investments. Both investments have an initial cost of $ 5,000,000 and total net cash inflows of $ 8,000,000 over 10 years. Chatman requires a 12% rate of return on this type of investment. Expected net cash inflows are as follows:
Requirements
1. Use Excel to compute the NPV and IRR of the two plans. Which plan, if any, should the company pursue?
2. Explain the relationship between NPV and IRR. Based on this relationship and the company’s required rate of return, are your answers as expected in Requirement 1? Why or why not?
3. After further negotiating, the company can now invest with an initial cost of $ 4,500,000. Recalculate the NPV and IRR. Which plan, if any, should the company pursue?
Plan Alpha Plan Beta $ 800,000 1,000,000 1,500,000 800,000 ,200,000 1,000,000 800,000 700,000 600,000 Year 2 800,000 800,000 800,000 800,000 800,000 500,000 800,000 400,000 800,000 800,000 $8,000,000 10 300,000 Total 8,000,000
Step by Step Answer:
Requirement 1 Microsoft Excel Results Microsoft Excel Formulas Plan Alpha Plan Beta Net present value NPV 479822 rounded 101073 rounded Internal rate of return IRR 961 rounded 1262 rounded Based on th...View the full answer
Horngrens Financial and Managerial Accounting
ISBN: 978-0133255584
4th Edition
Authors: Tracie L. Nobles, Brenda L. Mattison, Ella Mae Matsumura
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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