Question
Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product: Expected annual revenues: $710,000
Net Present Value
Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product:
- Expected annual revenues: $710,000
- Projected product life cycle: five years
- Equipment: $770,000 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 $426,000
- Required rate of return: 8 percent
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Estimate the annual cash flows for the new product. Enter cash outflows as negative amounts and cash inflows as positive amounts.
Year | Cash Flow |
0 | $ 870,000 |
14 | $ 284,000 |
5 | $ 504,000 |
2. Using the estimated annual cash flows, calculate the NPV. $_______________
3. What if revenues were overestimated by $142,000? 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.
Year | Cash Flow | Present Value |
0 | $__________ | $___________ |
14 | ___________ | ____________ |
5 | ___________ | ____________ |
Net present value | $___________ |
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