Question
Janes Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $225,000 and each with an eight-year life
Janes Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of $225,000 and each with an eight-year life and expected total net cash flows of $360,000. Location 1 is expected to provide equal annual net cash flows of $45,000, and Location 2 is expected to have the following unequal annual net cash flows:
Year 1 | $101,000 |
Year 2 | 77,000 |
Year 3 | 47,000 |
Year 4 | 43,000 |
Year 5 | 32,000 |
Year 6 | 24,000 |
Year 7 | 19,000 |
Year 8 | 17,000 |
Determine the cash payback period for both location proposals.
Location 1 | years |
Location 2 | years |
The following data are accumulated by Geddes Company in evaluating the purchase of $157,400 of equipment, having a four-year useful life:
Net Income | Net Cash Flow | |||
Year 1 | $40,000 | $68,000 | ||
Year 2 | 24,000 | 52,000 | ||
Year 3 | 12,000 | 39,000 | ||
Year 4 | (1,000) | 27,000 |
Present Value of $1 at Compound Interest | |||||
Year | 6% | 10% | 12% | 15% | 20% |
1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |
2 | 0.890 | 0.826 | 0.797 | 0.756 | 0.694 |
3 | 0.840 | 0.751 | 0.712 | 0.658 | 0.579 |
4 | 0.792 | 0.683 | 0.636 | 0.572 | 0.482 |
5 | 0.747 | 0.621 | 0.567 | 0.497 | 0.402 |
6 | 0.705 | 0.564 | 0.507 | 0.432 | 0.335 |
7 | 0.665 | 0.513 | 0.452 | 0.376 | 0.279 |
8 | 0.627 | 0.467 | 0.404 | 0.327 | 0.233 |
9 | 0.592 | 0.424 | 0.361 | 0.284 | 0.194 |
10 | 0.558 | 0.386 | 0.322 | 0.247 | 0.162 |
a. Assuming that the desired rate of return is 12%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.
Present value of net cash flow | $fill in the blank 1 |
Amount to be invested | fill in the blank 2 |
Net present value | $fill in the blank 3 |
b. Would management be likely to look with favor on the proposal? , because the net present value indicates that the return on the proposal is than the minimum desired rate of return of 12%.
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