Exercise 14-28 Net Present Value 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 6 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 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 $45,000. Required:
1. Compute the NPV for Southward Manufacturing, assuming a discount rate of 12%. Should the company buy the new welding system?
2. CONCEPTUAL CONNECTION Assuming a required rate of return of 8%, calculate the NPV for Kaylin Day’s investment. Should she invest? What if the estimated return was $45,000 per year? Would this affect the decision? What does this tell you about your analysis?
3. What was the required investment for Goates Company’s project?