Net Present Value/Present Value Index - 2559 Words

Net Present Value/Present Value Index The management team at Savage Corporation is evaluating two alternative capital investment opportunities. The first alternative, modernizing the company’s current machinery, costs $45,000. Management estimates the modernization project will reduce annual net cash outflows by $12,500 per year for the next five years. The second alternative, purchasing a new machine, costs $56,500. The new machine is expected to have a five-year useful life and a $4,000 salvage value. Management estimates the new machine will generate cash inflows of $15,000 per year. Savage’s cost of capital is 10%. Required a. Determine the present value of the cash flow savings expected from the modernization†¦show more content†¦Indicate whether the investment opportunity should be accepted. The Internal Rate of Return appears to be higher than the established investment opportunity hurdle rate of 15 percent therefore it would be a good idea to accept this investment opportunity. Exercise 24-6A Determining net present value Travis Vintor is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Travis expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows. Year of Operation Cash Inflow Cash Outflow 2006 $5,400 $3,600 2007 7,800 4,800 2008 8,400 5,040 2009 8,400 5,040 In addition to these cash flows, Mr. Vintor expects to pay $8,400 for the equipment. He also expects to pay $1,440 for a major overhaul and updating of the equipment at the end of the second year ofShow MoreRelatedCapital Budget Recommendation1135 Words   |  5 PagesAn overview of each possible technique provide it this paper before explaining how the how the recommendation was made. After considering Guillermo s circumstance, evaluating Guillermo Furniture s data sheet and using the present value index method to compare his alternative capital investment opportunities, a recommendation was ready to be made to Guillermo. It is recommended that Guillermo select the high technology investment solution because of its higher return rate. Read MoreCash Flow Per Period Of A Project790 Words   |  4 Pagesuneven, we need to calculate the cumulative net cash flow for each period and then use the following formula for payback period: Payback Period = A + B C In the above formula, A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Profitability Index is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initialRead MoreManagerial Economics in Coca Cola1185 Words   |  5 Pages1-Pay back period 2-Net present value 3-Internal rate of return 4-Profitability index These method are explained below, 1-PAY BACK PERIOD: Payback period is the exect length of time needed to recover the intial investment of the firm as calculated from the cash inflows. Payback period method is the least prices of all capital budgting methods because calculation is done in rupees and not adjusted from the time value of money. For examle the followingRead MoreNet Present Value and Materials Price Variance1317 Words   |  6 Pages$2) – (4,500 Ãâ€" $2) = $1,000 U 4. Stiner Company’s total materials variance is   Ã‚  Ã‚  Ã‚  Ã‚  A) $2,000 U.   Ã‚  Ã‚  Ã‚  Ã‚  B) $2,000 F.   Ã‚  Ã‚  Ã‚  Ã‚  C) $2,100 U.   Ã‚  Ã‚  Ã‚  Ã‚  D) $2,100 F. = $1,000 + $1,000 = $2,000 U 5. Which of the following will increase the net present value of a project?   Ã‚  Ã‚  Ã‚  Ã‚  A) An increase in the initial investment.   Ã‚  Ã‚  Ã‚  Ã‚  B) A decrease in annual cash inflows.   Ã‚  Ã‚  Ã‚  Ã‚  C) An increase in the discount rate.   Ã‚  Ã‚  Ã‚  Ã‚  D) A decrease in the discount rate. 6. Which of the following is true?   Ã‚  Ã‚  Ã‚  Ã‚  A) TheRead MoreThe Necessity Of Capital Expenditure Essay849 Words   |  4 Pagesthrough the three steps: Identifying a process improvement opportunity, create a formula to calculate the benefits, and determine the costs of the process and the net benefits. This week, I am going to discuss with you The Justification of Capital Expenditure. In this subject, we are going to see the net present value and the profitability index that should be considered when investing HER. In this presentation, I am going to show you the profitability of applying EMR to make decision effectively, andRead MorePlease compare the advantages and disadvantages of the following investment rules: Net Present Value (NPV), Payback Period and Discounted Payback Period981 Words   |  4 Pages Net present value is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of moneyto appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met. The advantages of the NPV are following; first, it tells whether the investment will increase the firm’s value. Also, it considers all the cash flowsRead MoreAdvantages And Disadvantages Of Npv Essay847 Words   |  4 PagesAdvantages and Disadvantages of NPV The net present value method has three principal advantages. 1. It uses cash flows rather than net earnings. Cash flows include depreciation as a source of funds. We already know depreciation is not a cash expenditure in the year the asset is depreciated. Unlike accounting, the field of finance considers cash flows rather than net earnings. 2.the NPV method acknowledges the time value of money. The longer the time, the greater the risk, therefore the higher theRead MoreBethesda Mining Company Essay1596 Words   |  7 Pagesto the state for use as a public park and recreation area and receive a charitable expense deduction of $6,000,000. The purpose of this paper is to analyze the project through calculating the payback period, profitability index, average accounting return, net present value, internal rate of return, and modified internal rate of return for the new strip mine. Based on these calculations, it will be determined whether Bethesda should take the contract and open the mine or pursue other opportunitiesRead MoreEssay on Capital 20Budget 20Analysis 20Group 20P1648 Words   |  7 Pagesorganizations is defined and reported. Key terms related to capital budgeting are also defined. Risk analysis based on the Net Present Value (NPV) is performed on the salvage values before and after sales tax values along with the different sale ranges. Keywords: NPV, NPV Profile, NPV, IRR, multiple IRRs, ranking conflict of NPV vs. IRR, payback period, profitability index, discount rate, cost of capital concept, cash flow analysis, cash flow timeline, conventional cash flow stream, non-conventionalRead MoreAdvantages Of Non Numeric Selection Models1068 Words   |  5 Pages(ARR); †¢ Net present value (NPV); †¢ Internal rate of return (IRR); †¢ Profitability index. †¢ The payback period: The formula to find the payback period is: (cost of the project) / (annual cash flows of the project). The project leader chooses the project with the lowest payback period. †¢ The average rate of return (ARR): The project leader chooses the project that gives a reasonable rate of return on the investments made. †¢ The net present value (NPV): NPV represents the net present value of all