Bulldog Memorabilia, a small screen printing firm, is considering investing in new technology that allows customers to
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Question:
- Bulldog Memorabilia, a small screen printing firm, is considering investing in new technology that allows customers to design their own products online, then they are automatically printed and shipped with only minimal labor costs. The firm has projected the following cash flows
Time 0 Time 1 Time 2 Time 3 Time 4 Time 5
-2,000,000 450,000 550,000 625,000 600,000 400,000
The firm anticipates selling the equipment for 300,000 (its salvage value) at time 5 and estimates the project cost of capital to be 10%. The firm estimates the IRR on the project to be 13.19
NPV = 177,661.11
- She has asked you to recalculate the NPV assuming that each future cash flow and the salvage value are 10% higher than her initial estimate or 10 % lower. How is the estimate of NPV changed in each case (case1all future cash flows and the salvage value increase by 10%, case 2 all cash future flows and the salvage value decrease by 10%)? Assume that there is a 25% probability of the increased cash flows, a 25% probability of the decreased cash flows and a 50% probability of the original estimate in problem 1. What is the expected NPV of the project? (10 points)
- Does the range of outcomes and expected NPV change how you would view the riskiness project and the likelihood that you would accept the project? Explain in detail and relate your answer to the issues associated with using NPV to evaluate a project (how accurate are the projected future cash flows? What types of assumptions must be made to forecast the future cash flows used in the analysis? Does the basic NPV or the expected NPV provide better information upon which to base a decision? (5 points)
Related Book For
Cost Accounting Foundations and Evolutions
ISBN: 978-1111626822
8th Edition
Authors: Michael R. Kinney, Cecily A. Raiborn
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