Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.
Southward Manufacturing is considering the purchase of a new welding system. The cash benefits will be $400,000 per year. The system costs $1,450,000 and will last 10 years.
Kaylin Day is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $45,000 per year. She estimates that the shop will have a useful life of 6 years.
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%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.
$_____
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. Round to the nearest dollar. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a negative NPV.
$_____
Should she invest?
What if the estimated return was $45,000 per year? Calculate the new NPV for Kaylin Day's investment. Round to the nearest dollar.
$_____
3. What was the required investment for Goates Company's project? Round to the nearest dollar. If required, round all present value calculations to the nearest dollar.
$_____