Question
4. Answer parts a through e regarding the following investment project. Ms. Phy Nance, a project analyst at DROF Motor Co., would like her
4. Answer parts a through e regarding the following investment project. Ms. Phy Nance, a project analyst at DROF Motor Co., would like her project included in next year's capital budget. According to her report, the new equipment would cost $127,437 and its projected cash flows would be as follows (note: the opportunity cost of capital is 17%) Year 1 42,000 Year 2 46,000 Year 3 53,000 Year 4 53,000 Year 5 63,000 a.) What is the NPV calculated by the analyst? If her numbers are correct should you accept the project? b.) Assume that the analyst included shipping and set-up costs of $2,437 in her estimation of the cost of the initial investment. Is this procedure correct? Why c.) Assume that no consideration was given to the fact that the floor space used for this project could be rented each year for $15,000 per year How would this affect the calculation. d.) Included in her analysis, Ms Nance calculated that lighting, heating and air conditioning cast the company $8.000 per year and that the new equipment occupies 50% of the total floor space so she deducted $4,000 per year from the cash flows to reflect overhead costs for the new equipments this deduction correct or should it be reversed? e.) Given your answers to b, c, and d. What is your calculation of Net Present Value for this project and would you include it in next year's capital budget? 2
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