Question
Johnson & Johnson is evaluating a new medical device project that requires an initial investment of $4,500,000. The expected annual cash inflows from the project
Johnson & Johnson is evaluating a new medical device project that requires an initial investment of $4,500,000. The expected annual cash inflows from the project are as follows:
| Year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Cash Inflows ($) | 900,000 | 950,000 | 1,000,000 | 1,050,000 | 1,100,000 |
The discount rate for the project is 11%. The equipment has a residual value of $200,000 at the end of its 5-year life. The corporate tax rate is 27%.
Required:
- Calculate the net present value (NPV) of the project.
- Compute the internal rate of return (IRR).
- Determine the accounting rate of return (ARR).
- Assess the impact of the residual value on the project's profitability.
- Evaluate the sensitivity of NPV to changes in annual cash inflows.
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Financial Accounting
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann
2nd Edition
0078110823, 9780078110825
