Assignment Chapter 14 Lo 31 Cornerstone Exercise 14 23net Pr

Assignmentchapter 14 Lo 31cornerstone Exercise 14 23net Present Valu

Evaluate the net present value (NPV) of a new product investment plan, including initial investment costs, expected revenues, expenses, salvage value, working capital, and appropriate discount rates. Prepare a schedule of projected annual cash flows, and compute the NPV using specified discount factors, considering both single and combined exhibits for present value factors. Additionally, analyze independent investment scenarios with different cash flows and discount rates, calculating NPVs and making investment recommendations. Finally, compare multiple projects with different cash flows to determine the most advantageous investment based on NPV calculations.

Paper For Above instruction

The evaluation of investment projects using net present value (NPV) analysis is fundamental in financial decision-making, enabling firms to assess the profitability of potential investments based on the discounted value of expected cash flows. The present case involves Holland, Inc., considering launching a new cell phone product, requiring careful calculation of projected cash flows over the product's life cycle and subsequently determining the NPV using discount factors derived from financial exhibits.

To begin, it is necessary to develop a comprehensive schedule of annual cash flows associated with the new product. The initial investment includes the purchase of new equipment costing $1,440,000 and an increase in working capital of $180,000, both required at Year 0. The equipment, with a salvage value of $180,000 after five years, can be sold at that time, and the working capital investment will be recovered at project completion. Throughout the project's duration, revenue generation is projected at $1,350,000 annually, with operating expenses estimated at $810,000, resulting in annual cash inflows of $540,000 in years 1-4. In the fifth year, revenues and expenses will remain the same, with the addition of salvage value proceeds and the recovery of working capital, which contribute to total cash flows.

The discount rate, specified as 8 percent, enables the calculation of present values (PV) for each year's cash flows. To compute NPV, the present value of all future cash inflows and outflows must be summed, including initial investments and terminal cash flows. Using the discount factors from Exhibit 14B-1, one can discount each year's cash flow, sum these present values, and derive the net value of the project.

The subsequent step involves calculating the NPV by incorporating discount factors from both Exhibit 14B-1 and 14B-2. These exhibits provide PV of $1 and PV of an annuity of $1, respectively, essential for discounting uneven cash flows across multiple periods. Discounting each year's cash flow accordingly, the combined valuation provides a comprehensive understanding of the investment's attractiveness.

The analysis extends to three independent scenarios derived from exercises 14-28 and 14-30. The first involves Southward Manufacturing, considering the purchase of a welding system costing $2,250,000 with an annual benefit of $400,000 over ten years. Using a 12 percent discount rate and the PV of an annuity factor, the NPV is calculated to judge the feasibility of the investment. The second scenario examines Kaylin Day's investment in a women's shop with an initial cost of $180,000, expected annual cash flows of $35,000, and a six-year lifespan, again using a 12 percent rate. The third involves Goates Company, which projected an NPV of $21,300 over an eight-year period at a 10 percent discount rate, based on annual cash inflows of $45,000.

Finally, the comparison of two competing dialysis equipment projects from Wilburton Hospital allows for selecting the best investment. Both projects require a $700,000 initial outlay and produce cash inflows over five years with no salvage value. By calculating the NPVs using a 12 percent discount rate and the PV factors, management can determine which option yields the higher net value. A third alternative involving an out-of-state supplier with a constant cash flow must be evaluated to find the minimum annual cash flow necessary to match or exceed the NPVs of other options.

This comprehensive financial analysis informs strategic investment decisions, illustrating how to evaluate multiple projects under varying assumptions of cash flows, discount rates, and project durations. It emphasizes the importance of precise cash flow estimation, appropriate discount rate application, and comparative analysis to prioritize projects that maximize shareholder value.

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