Fundamental of Corporate Finance Fundamental of Corporate Finance FIN202 Fundamental of Corporate Finance Individual Assignment Chapter 10 10 1 – 10 5 10 1 Net present value Riggs Corp management is p.
Fundamental of Corporate Finance FIN202: Fundamental of Corporate Finance Individual Assignment Chapter 10: 10.1 – 10.5 10.1 Net present value: Riggs Corp management is planning to spend $650,000 on a new marketing campaign They believe that this action will result in additional cash flows of $325,000 over the next three years If the discount rate is 17.5 percent, what is the NPV on this project? Solution: NPV = NCF0 + NCF NCF NCF + + (1+k ) ( 1+ k )2 ( 1+ k )3 IB17B02 Fundamental of Corporate Finance = -$650,000 + $ 325,000 $ 325,000 $ 325,000 + + 1.175 1.1752 1.1753 ≈ $62,337.343 10.2 Net present value: Kingston, Inc management is considering purchasing a new machine at a cost of $4,133,250 They expect this equipment to produce cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years If the appropriate discount rate is 15 percent, what is the NPV of this investment? Solution: NPV = NCF0 + NCF NCF NCF NCF NCF NCF + + + + + (1+k ) ( 1+ k )2 ( 1+ k )3 ( 1+k )4 ( 1+k )5 ( 1+ k )6 = -$4,133,250 + $ 814,322 $ 863,275 $ 937,250 $ 1,017,112 $ 1,212,960 $ 1,225,000 + + + + + 1.15 1.152 1.153 1.154 1.155 1.156 ≈ - $441,933.015 10.3 Net present value: Crescent Industries management is planning to replace some existing machinery in its plant The cost of the new equipment and the resulting cash flows are shown in the accompanying table If the firm uses an 18 percent discount rate for projects like this, should management go ahead with the project? Solution: NPV = NCF0 + NCF NCF NCF NCF + + + (1+k ) ( 1+ k )2 ( 1+k )3 ( 1+ k )4 = -$3,300,000 + $ 875,123 $ 966,222 $ 1,145,000 $ 1,250,399 + + + 1.18 1.18 1.18 1.18 = -$522,620.5 Management should not go ahead with this project because NPV < IB17B02 Fundamental of Corporate Finance 10.4 Net present value: Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500 They project that the cash flows from this investment will be $121,450 for the next seven years If the appropriate discount rate is 14 percent, what is the NPV for the project? Solution: n=7 NPV = NCF0 + ∑ NCF n n ( 1+ k ) = -$312,500 + ∑ n =1 $ 121,450 n 1.14 ≈ $208,314.623 10.5 Net present value: Blanda Incorporated management is considering investing in two alternative production systems The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table If the firm uses a percent discount rate for production system projects, in which system should the firm invest? Solution: System 1: NPV1 = NCF0 + NCF NCF NCF + + (1+k ) ( 1+ k )2 ( 1+ k )3 = -$15,000 + $ 15,000 $ 15,000 $ 15,000 + + ≈ $22,969.42 1.09 1.092 1.09 System 2: NPV2 = NCF0 + NCF NCF NCF + + (1+k ) ( 1+ k )2 ( 1+ k )3 = -$45,000 + $ 32,000 $ 32,000 $ 32,000 + + 1.09 1.09 1.09 ≈ $36,001.43 IB17B02 Fundamental of Corporate Finance The firm should invest in system because NPV > NPV1 IB17B02