J. Morgan of Spark Plug Incorporated has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $2,730,000, and the after-tax net cash inflows will be $400,000 per year for 12 years. Spark Plug currently uses 7% as its after-tax cost of capital. Tom Morgan, production manager, is very much in favor of the investment. He argues that the total after-tax net cash inflows is more than the cost of the investment, even if the demand for the product is somewhat uncertain. "The project will pay for itself even if the demand is only half the projected level." Cindy Morgan (corporate controller) believes that the cost of capital should be 10% because of the declining demand for Spark Plug products. Required: 1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 7%? Use the built-in NPV function in Excel. (Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.) 2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 10% ? Use the built-in NPV function in Excel. (Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.) 3. Use the built-in function in Excel to estimate the project's IRR. (Round your answer to 1 decimal places.) 4. Do a sensitivity analysis by using GOAL SEEK to determine, given estimated cash inflows, the original investment outlay that would result in an IRR of 10%. (Round your answer to nearest whole dollar amount.) Answer is complete but not entirely correct.
J. Morgan of Spark Plug Incorporated has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $2,730,000, and the after-tax net cash inflows will be $400,000 per year for 12 years. Spark Plug currently uses 7% as its after-tax cost of capital. Tom Morgan, production manager, is very much in favor of the investment. He argues that the total after-tax net cash inflows is more than the cost of the investment, even if the demand for the product is somewhat uncertain. "The project will pay for itself even if the demand is only half the projected level." Cindy Morgan (corporate controller) believes that the cost of capital should be 10% because of the declining demand for Spark Plug products. Required: 1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 7%? Use the built-in NPV function in Excel. (Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.) 2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 10% ? Use the built-in NPV function in Excel. (Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.) 3. Use the built-in function in Excel to estimate the project's IRR. (Round your answer to 1 decimal places.) 4. Do a sensitivity analysis by using GOAL SEEK to determine, given estimated cash inflows, the original investment outlay that would result in an IRR of 10%. (Round your answer to nearest whole dollar amount.) Answer is complete but not entirely correct.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 25P
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Transcribed Image Text:J. Morgan of Spark Plug Incorporated has been approached to take over a production facility from B.R. Machine Company. The
acquisition will cost $2,730,000, and the after-tax net cash inflows will be $400,000 per year for 12 years.
SparkPlug currently uses 7% as its after-tax cost of capital. Tom Morgan, production manager, is very much in favor of the investment.
He argues that the total after-tax net cash inflows is more than the cost of the investment, even if the demand for the product is
somewhat uncertain. "The project will pay for itself even if the demand is only half the projected level." Cindy Morgan (corporate
controller) believes that the cost of capital should be 10% because of the declining demand for Spark Plug products.
Required:
1. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 7%? Use the built-in NPV function in Excel.
(Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.)
2. What is the estimated NPV of the project if the after-tax cost of capital (discount rate) is 10%? Use the built-in NPV function in Excel.
(Negative amounts should be indicated by a minus sign. Round your answer to the nearest whole dollar amount.)
3. Use the built-in function in Excel to estimate the project's IRR. (Round your answer to 1 decimal places.)
4. Do a sensitivity analysis by using GOAL SEEK to determine, given estimated cash inflows, the original investment outlay that would
result in an IRR of 10%. (Round your answer to nearest whole dollar amount.)
1.
2.
3.
4.
NPV
NPV
IRR
Answer is complete but not entirely correct.
Break-even amount
$
$
$
447,075
(4,523)✔
10.0
2,981,000 x
%
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