Ch$19$ Homework

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Net Present Value

Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:

Expected annual revenues: $$700,000$

Projected product life cycle: five years

Equipment: $$760,000$ with a salvage value of $$100,000$ after five years

Expected increase in working capital: $$120,000($recoverable at the end of five years$)$

Annual cash operating expenses: estimated at $$420,000$

Required rate of return: $8$ percent

The present value tables provided in Exhibit $19$B$.1$ and Exhibit $19$B$.2$ must be used to solve the following problems.

Required:

Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.

Using the estimated annual cash flows, calculate the NPV$.$

$237,958\mathrm{.}81$

What if revenues were overestimated by $$140,000?$ 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.

$\backslash$table$[[$Year$,$Cash Flow,Present Value$],[0,,],[1-4,,],[5,,]]$

Net present value