Net Present Value

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

Expected annual revenues: $740,000

Projected product life cycle: five years

Equipment: $720,000 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 $444,000

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	$_____?________
1-4	$______?_______
5	$______?_______

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

$_____?_____ not 497959

3. What if revenues were overestimated by $148,000? 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	-820000	-820000
1-4	148000	________? ________not 490191
5	348000	_________? ________not 236849
net present value		$_______?_______not -92960

Year Cash Flow Present Value 0 $__________ $__________ 1-4 $___________ $__________ 5 $___________ $__________ Net present value_________________________$___________