“net present value” help please


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2.  Exercise 14-28
Net Present Value

Use the Exhibit 14B-1 and Exhibit 14B-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.

a.     Southward Manufacturing is considering the purchase of a new welding system. The cash benefits will be $400,000 per year. The system costs $2,250,000 and will last 10 years.

b.    Kaylin Day is interested in investing in a women’s specialty shop. The cost of the investment is $180,000. 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 six years.

c.     Goates Company calculated the NPV of a project and found it to be $21,300. The project’s life was estimated to be eight years. The required rate of return used for the NPV calculation was 10 percent. The project was expected to produce annual after-tax cash flows of $45,000.

1.  Compute the NPV for Southward Manufacturing, assuming a discount rate of 12 percent. Round to the nearest dollar.
$     _________________  

Should the company buy the new welding system?

2.  Conceptual Connection: Assuming a required rate of return of 8 percent, calculate the NPV for Kaylin Day’s investment. Round to the nearest dollar.
$     _________________  

Should she invest?

Calculate the NPV assuming the estimated return was $45,000 per year. Round to the nearest dollar.
$     ________  

Would this affect the decision? What does this tell you about your analysis?
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3.  What was the required investment for Goates Company’s project? Round to the nearest dollar.
$     _________________