Question Content Area Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data
Question:
Question Content Area
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
- Expected annual revenues: $740,000
- Projected product life cycle: five years
- Equipment: $780,000 with a salvage value of $100,000 after five years
- Expected increase in working capital: $90,000 (recoverable at the end of five years)
- Annual cash operating expenses: estimated at $444,000
- Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.
Year | Cash Flow |
0 | $fill in the blank 1 |
1-4 | $fill in the blank 2 |
5 | $fill in the blank 3 |
2. Using the estimated annual cash flows, calculate the NPV. $fill in the blank 4
3. What if revenues were overestimated by $148,000? Redo the NPV analysis, correcting for this error. Assume the operating expenses remain the same. Enter cash outflows as negative amounts and cash inflows as positive amounts.
Year | Cash Flow | Present Value |
0 | $fill in the blank 5 | $fill in the blank 6 |
1-4 | fill in the blank 7 | fill in the blank 8 |
5 | fill in the blank 9 | fill in the blank 10 |
Net present value | $fill in the blank 11 |
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen