The Spieth Golf Company is considering the addition of acomputerized robot to its equipment. The initial cost of theequipment is $1,000,000, and the robot is expected to have a usefullife of five years and $200,000 salvage value. The cost savings andincreased capacity attributable to the machine are estimated togenerate increases in the firm's annual cash inflows (beforeconsidering depreciation) of $400,000.
Spieth has a weighted average cost of capital of 10%. Its marginalcost of capital is 12% .
Based on the information above provide appropriate quantitativeanalysis to support your answers to the following
A. What is the net present value, NPV, of the investment?
B. Should the robot be acquired by the firm?
C. What is the estimated Internal Rate of Return, IRR, on thisproposed investment?
The Spieth Golf Company is considering the addition of acomputerized robot to its equipment. The initial cost of theequipment is $1,000,000, and the robot is expected to have a usefullife of five years and $200,000 salvage value. The cost savings andincreased capacity attributable to the machine are estimated togenerate increases in the firm's annual cash inflows (beforeconsidering depreciation) of $400,000.
Spieth has a weighted average cost of capital of 10%. Its marginalcost of capital is 12% .
Based on the information above provide appropriate quantitativeanalysis to support your answers to the following
A. What is the net present value, NPV, of the investment?
B. Should the robot be acquired by the firm?
C. What is the estimated Internal Rate of Return, IRR, on thisproposed investment?
Related questions
QUESTION 1
Which of the following statements is correct regarding thepayback method as a capital budgeting technique?
The payback method considers the time value of money. | ||
An advantage of the payback method is that it indicates if aninvestment will be profitable. | ||
The payback method provides the years needed to recoup theinvestment in a project. | ||
Payback is calculated by dividing the annual cash inflows by thenet investment. |
0.625 points
QUESTION 2
Taxes are not an important consideration indeveloping cash flow assessments.
True
False
0.625 points
QUESTION 3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:
Parkways Inc. is considering the purchase of a new machine. Themachine will cost $60,000 to purchase and will generate $15,000 ofcash revenues per year for the next 8 years. The machine will cost$1,000 per year to operate & maintain. At the end of it'suseful life, it has an estimated salvage value of $5,000. Parkwaysrequires a minimum rate of return of 14% for this class of asset.Determine the Net Present Value of this investment proposal.
PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639
$6,701 | ||
$57,000 | ||
$1,166 | ||
$0 |
0.625 points
QUESTION 4
Sun Devil Corporation is adding a new product line that willrequire an investment of $138,000. The product line is estimated togenerate net cash flows of $25,000 the first year, $23,000 thesecond year, and $18,000 each year thereafter for ten more years.What is the payback period?
7.26 | ||
5.52 | ||
7.00 | ||
7.67 |
0.625 points
QUESTION 5
Sparky Company invested in an asset with a useful life of 5years. The companys required rate of return is 10% for this classof asset. The net cash flows are estimated to be $7,610 per yearfor the next 5 years and no salvage value is anticipated.
If the asset generates a positive net present value of $2,000,what was the amount of the original investment? (Roundyour answer to the nearest whole dollar. Do not use $signs or commas in recording youranswer. EXAMPLE: If you answer is $22,516,enter your answer as 22516).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 6
Suppose Whole Foods is considering investing inwarehouse-management software that costs $500,000, has $60,000residual value and should lead to cash cost savings of $130,000 peryear for its five-year life. Determine the NPV of the investment ifmanagement uses a 12% discount rate. (Round to the nearest wholenumber for your final answer. When recording your answer, do notuse $ dollar signs or commas. EXAMPLE: If you answer is $12,251,enter 12251)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 7
ABC, Corporation is looking to purchase a new piece of equipmentfor $121,505. The equipment has a useful life of 8 years and noexpected salvage value.
The minimum desired rate of return is 10%. ABC is uncertain asto the annual net cash flows the equipment will generate.
What is the minimum annual net cashflow ABC must achieve in order to justify the purchase of this newequipment?
(Round your answer to the nearest whole dollar. Do not use $dollar signs or commas when recording your answer.)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 8
Sparky Company is considering the replacement of an old machinewith the purchase of a new piece of production equipment that willreduce labor and maintenance costs by $45,000 peryear. If Sparky purchases the new machine, the companywill sell the old equipment for an estimated $20,000 salvage value.Data related to the new machine follows:
InitialInvestment $300,000
UsefulLife 10years
Salvagevalue (newmachine) $30,000
HurdleRate 12%
Assume all cash flows occur at the end of the year and ignoreincome taxes. Calculate the net present value of theinvestment in the new machine. (Round your answer to the nearestwhole dollar. If you have a negative NPV, record youranswer using () parenthesis. EXAMPLE: If yourNPV is ($2,000), enter your answer as (2000).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
CAN SOMEONE PLEASE EXPLAIN EACH ANSWER
ACG 2071 â Comprehensive Problem IV
When submitting the completed project, please show all work andnumber each answer accordingly.
When calculating the NPV use the following five columns (use forALL NPV calculations):
Item | Year(s) | Cash Flow | Discount Factor | Present Value of Cash Flows |
Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreignmanufacturers. The following figures ere estimatedregarding the construction of the new plant.
Cost of plant | $4,000,000.00 | Estimated useful life | 15 years | |
Annual cash inflows | $4,000,000.00 | Salvage value | $2,000,000.00 | |
Annual cash outflows | $3,550,000.00 | Discount rate | 11% |
James Bott believes that thesefigures understate the true potential value of the plant. Hesuggests that by manufacturing its own skateboards the company willbenefit from a âbuy Americanâ patriotism that he believes is commonamong skateboarders. He also notes that the firm has had numerousquality control problems with the skateboards manufactured by itssuppliers. He suggests that the inconsistent quality has resultedin lost sales, increased warranty claims, and some costly lawsuits.Overall, he believes sales will be $200,000 higher than theprojected above, and that the savings from lower warranty costs andlegal costs will be $80,000 per year. He also believes that theproject is not as risky as assumed above, and that a 9% discountrate is more reasonable.
Compute the Cash Payback period for the project based on theoriginal projections.
Compute the net present value of the project based on theoriginal projections.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown | |||
Capital Investment | $200,000.00 | ||
Annual Net Income: | |||
Year 1 | $25,000.00 | ||
Year 2 | $16,000.00 | ||
Year 3 | $13,000.00 | ||
Year 4 | $10,000.00 | ||
Year 5 | $8,000.00 | ||
Total | $72,000.00 |
Required:
Compute the cash payback period for the project. (round to twodecimal places)
Compute the net present value for the project (round to thenearest dollar)
Compute the annual rate of return for the project.
Compute the profitability index for the project.
very confused, can you please explain each answer! thanks
ACG 2071 â Comprehensive Problem IV
When submitting the completed project, please show all work andnumber each answer accordingly.
When calculating the NPV use the following five columns (use forALL NPV calculations):
Item | Year(s) | Cash Flow | Discount Factor | Present Value of Cash Flows |
Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreignmanufacturers. The following figures ere estimatedregarding the construction of the new plant.
Cost of plant | $4,000,000.00 | Estimated useful life | 15 years | |
Annual cash inflows | $4,000,000.00 | Salvage value | $2,000,000.00 | |
Annual cash outflows | $3,550,000.00 | Discount rate | 11% |
James Bott believes that thesefigures understate the true potential value of the plant. Hesuggests that by manufacturing its own skateboards the company willbenefit from a âbuy Americanâ patriotism that he believes is commonamong skateboarders. He also notes that the firm has had numerousquality control problems with the skateboards manufactured by itssuppliers. He suggests that the inconsistent quality has resultedin lost sales, increased warranty claims, and some costly lawsuits.Overall, he believes sales will be $200,000 higher than theprojected above, and that the savings from lower warranty costs andlegal costs will be $80,000 per year. He also believes that theproject is not as risky as assumed above, and that a 9% discountrate is more reasonable.
Compute the Cash Payback period for the project based on theoriginal projections.
Compute the net present value of the project based on theoriginal projections.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown | |||
Capital Investment | $200,000.00 | ||
Annual Net Income: | |||
Year 1 | $25,000.00 | ||
Year 2 | $16,000.00 | ||
Year 3 | $13,000.00 | ||
Year 4 | $10,000.00 | ||
Year 5 | $8,000.00 | ||
Total | $72,000.00 |
Required:
Compute the cash payback period for the project. (round to twodecimal places)
Compute the net present value for the project (round to thenearest dollar)
Compute the annual rate of return for the project.
Compute the profitability index for the project.
