Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with...
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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: $750,000 Projected product life cycle: five years Equipment: $800,000 with a salvage value of $100,000 after five years Expected increase in working capital: $100,000 (recoverable at the end of five years) Annual cash operating expenses: estimated at $450,000 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 -900,000 1-4 $ 300,000 5 500,000 2. Using the estimated annual cash flows, calculate the NPV. $ 433,900 X 3. What if revenues were overestimated by $150,000? 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 0 Cash Flow Present Value -900,000 1-4 150,000 5 350,000 -900,000 496,800 350,000 X Net present value -164,990 X Net Present Value Carsen Sorensen, controller of Thayn Company, just received the following data associated with production of a new product: Expected annual revenues: $750,000 Projected product life cycle: five years Equipment: $800,000 with a salvage value of $100,000 after five years Expected increase in working capital: $100,000 (recoverable at the end of five years) Annual cash operating expenses: estimated at $450,000 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 -900,000 1-4 $ 300,000 5 500,000 2. Using the estimated annual cash flows, calculate the NPV. $ 433,900 X 3. What if revenues were overestimated by $150,000? 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 0 Cash Flow Present Value -900,000 1-4 150,000 5 350,000 -900,000 496,800 350,000 X Net present value -164,990 X
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1 The annual cash flows for the new product are as follows Year 0 900000 initial ... View the full answer
Related Book For
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen
Posted Date:
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