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 198.1 and Exhibit 198.2 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 0 1-4 5 $ Cash Flow 2. Using the estimated annual cash flows, calculate the NPV Year 3. What if revenues were overestimated by $150,0007 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. Present Value 0 1-4 5 Net present value Cash Flow

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 198.1 and Exhibit 198.2 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 0 1-4 5 $ Cash Flow 2. Using the estimated annual cash flows, calculate the NPV Year 3. What if revenues were overestimated by $150,0007 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. Present Value 0 1-4 5 Net present value Cash Flow

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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