Net Present Value

Use Exhibit $12$B$\mathrm{.}1$ and Exhibit $12$B$\mathrm{.}2$ to locate the present value of an annuity of $$1,$ which is the amount to be multiplied times the future annual cash flow amount.

Each of the following scenarios is independent. Assume that all cash flows are after$-$tax cash flows.

Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $$480,000$ per year. The system costs $$2,950,000$ and will last $10$ years.

Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $$330,000.$ She estimates that the return from owning her own shop will be $$35,000$ per year. She estimates that the shop will have a useful life of $6$ years.

Barker Company calculated the NPV of a project and found it to be $$63,900.$ The project's life was estimated to be $8$ years. The required rate of return used for the NPV calculation was $10\%.$ The project was expected to produce annual after$-$tax cash flows of $$135,000.$

Required:

$1.$ Compute the NPV for Campbell Manufacturing, assuming a discount rate of $12\%.$ If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV$.$

$fill in the blank $1$

Should the company buy the new welding system?

No

$2.$ Conceptual Connection: Assuming a required rate of return of $8\%,$ calculate the NPV for Evee Cardenas' investment. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV$.$

$fill in the blank $3$

Should she invest?

No

What if the estimated return was $$135,000$ per year? Calculate the new NPV for Evee Cardenas' investment. Would this affect the decision? What does this tell you about your analysis? Round to the nearest dollar.

$fill in the blank $5$

The shop

should now

be purchased. This reveals that the decision to accept or reject in this case is affected by differences in estimated

cash flow

$3.$ What was the required investment for Barker Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar.

$fill in the blank $8$