Tonya, Inc. has a cost of capital of 15% and is considering the acquisition of a new machine that costs $800,000 and has a useful life of 5 years. Tonya projects that earnings and cash flow will increase as follows:The net present value of this investment is
Answer(s): C
The NPV is calculated by discounting the after-tax cash flows from an investment by the cost of capital:Subtracting the $800,000 initial cost from the $837,200 present value of the future inflows produces an NPV of $37,200.
Tonya, Inc. has a cost of capital of 15% and is considering the acquisition of a new machine that costs $800,000 and has a useful life of 5 years. Tonya projects that earnings and cash flow will increase as follows:What is the profitability index for the investment?
The profitability index is the present value of the future net cash flows divided by the present value of the net initial investment. The present value of the future net cash flows is $837,200. Dividing the $800,000 initial cost of the investment into the $837,200 present value of the future net cash inflows produces a profitability index of approximately 1 .05. Any profitability index greater than one is considered acceptable.
The Keego Company is planning a $200,000 equipment investment which has an estimated 5-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment.Assuming that the estimated cash inflows occur evenly during each year, the payback period for the investment is
The payback period is the number of years required to complete the return of the original investment. The principal problems with the payback method are that it does not consider the time value of money and the inflows after the payback period. The inflow for the first year is $120,000, the second year is $60,000, and the third year is $40,000, a total of $220,000. Given an initial investment of $200,000. the payback period must be between 2 and 3 years. If the cash inflows occur evenly throughout the year, $20,000 ($200,000 --$120,000-- $60,000) of cash inflows are needed in year 3, which is 50% of that year's total. Thus, the answer is 2.5 years.
The Keego Company is planning a $200,000 equipment investment which has an estimated 5-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment.The net present value for the investment is
Answer(s): A
The NPV is defined as the excess of the present value of the net cash inflows over the net cost of the investment. Discounting the future cash inflows by the present value factors results in an $18,800 NPV ($218,800 --$200,000).
Willis, Inc. has a desired rate of return of 15% and is considering the acquisition of a new machine which costs $400,000 and has a useful life of 5 years. Willis projects that earnings and cash flow will increase as follows:What is the payback period of Willis' investment?
Answer(s): B
The payback method calculates the number of years required to complete the return of the original investment. The initial cost is $400,000, so Willis will recoup its investment in 3 years ($160,000 in year 1 + $140,000 inyear2 + $100,000 in year 3).
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