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

a. Harrison Manufacturing is considering the purchase of a new welding system. The cash benefits will be $360,000 per year. The system costs $2,040,000 and will last 10 years.

b. Kylie Hepworth is interested in investing in a women’s specialty shop. The cost of the investment is $120,000. She estimates that the return from owning her own shop will be $36,000 per year. She estimates that the shop will have a useful life of six years.

c. Larsen Company calculated the NPV of a project and found it to be $7,100. The project’s life was estimated to be eight years. The required rate of return used for the NPV calculation was 10 percent. The project was expected to produce annual after-tax cash flows of $15,000.

Required:

. Compute the NPV for Harrison Manufacturing, assuming a discount rate of 12 percent. Should the company buy the new welding system?

. Assuming a required rate of return of 8 percent, calculate the NPV for Kylie Hepworth’s investment. Should she invest?

. What was the required investment for Larsen Company’s project?

Exercise