Acme International Proforma Income Statement Year 1
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Based on the information provided below, compute the Net Present Value of the project (CO 3). A Net Present Value Template is Attached. (Hint: Don't forget to update the discount rate to the amount required for this project and add your cash flow numbers.) Royal Dutch Shipping is planning on Investing $1,600,000 to buy a freighter. Prepare a net present value analysis based on the assumption that the freighter will be sold for 10% of its cost at the end of the year 5. Assume a 10% cost of capital. Annual operating cash flows for the project are: Year 1: $380,000 Year 2: $390,000 Year 3: $400,000 Year 4: $410,000 Year 5: $420,000 Prepare a loan amortization schedule based on monthly payments for the $1,600,000 if Royal Dutch Shipping can pay 10% down on a loan for $1,600,000 and can get a loan for 6% interest for 10 years (do not include this in your Net Present Value computations. This is a separate issue. (CO 3). (Hint: )
Paper For Above instruction
The calculation of the Net Present Value (NPV) is a crucial financial tool used by companies to evaluate the profitability of investment projects. In the context of Royal Dutch Shipping’s plan to acquire a new freighter, the NPV analysis incorporates several key components: initial investment cost, annual cash flows, salvage value, discount rate, and the time horizon. This process not only aids in understanding whether the project will generate value exceeding its cost but also assists in making informed capital budgeting decisions.
Firstly, the initial investment of $1,600,000 represents the upfront capital required for purchasing the freighter. The project’s ongoing cash flows are projected to be $380,000, $390,000, $400,000, $410,000, and $420,000 for each of the five years. These figures are based on expected operational revenues minus operating expenses, excluding depreciation, which is a non-cash charge. The assumption that the ship will be sold for 10% of its purchase price at the end of Year 5 introduces a salvage value of $160,000 ($1,600,000 * 10%).
Using a discount rate of 10%, which reflects the company's cost of capital, the present value of each year's cash flows is computed by discounting future cash flows back to their value in today's dollars. The formula employed is PV = Cash Flow / (1 + r)^t, where r is the discount rate and t is the year. Summing these present values, along with the present value of the salvage value, yields the total present value of future cash inflows.
The NPV calculation proceeds as follows: sum of discounted cash flows over the five-year period plus the discounted salvage value minus the initial investment. A positive NPV indicates that the project is expected to add value to the company, justifying the investment. Conversely, a negative NPV would suggest that the project may not be financially viable.
In addition to NPV analysis, it is essential to consider the financing structure, which involves a loan for 90% of the purchase price ($1,440,000). A separate amortization schedule can be prepared to determine monthly payments over the ten-year term at a 6% annual interest rate. The amortization process involves calculating fixed monthly payments using the formula for an installment loan, considering the principal, interest rate, and loan term. This schedule helps the company understand its debt service obligations, cash flow impact, and capacity to meet debt repayments without impairing operations.
In conclusion, the combined analysis of NPV and loan amortization provides comprehensive insight into the financial feasibility of the freighter acquisition. While the NPV assesses profitability and value creation, the amortization schedule ensures that financing obligations are manageable within the company's cash flow capacity. Both tools are vital for strategic decision-making in capital investments, balancing growth opportunities with financial stability.