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Net Present Value

Use Exhibit $12$B$\mathrm{.}1$ and Exhibit $12$B$\mathrm{.}2$ to locate the present value of an annuity of $$1,$ which is the amount to be multiplied times the future annual cash flow amount.

Each of the following scenarios is independent. Assume that all cash flows are after$-$tax cash flows.

Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $$480,000$ per year. The system costs $$1,350,000$ and will last $10$ years.

Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $$230,000.$ She estimates that the return from owning her own shop will be $$55,000$ per year. She estimates that the shop will have a useful life of $6$ years.

Barker Company calculated the NPV of a project and found it to be $$63,900.$ The project's life was estimated to be $8$ years. The required rate of return used for the NPV calculation was $10\%.$ The project was expected to produce annual after$-$tax cash flows of $$135,000.$

Required:

$1.$ Compute the NPV for Campbell Manufacturing, assuming a discount rate of $12\%.$ If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV$.$

fill in the blank $1$ of $1$$

Should the company buy the new welding system?

Yes

$2.$ Conceptual Connection: Assuming a required rate of return of $8\%,$ calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV$.$

fill in the blank $1$ of $1$$

Should she invest?

Yes

What if the estimated return was $$135,000$ per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar.

fill in the blank $1$ of $1$$

The shop

should now

be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated

cash flow

$3.$ What was the required investment for Barker Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar.

fill in the blank $1$ of $1$$