Bulldog Memorabilia, a small screen printing firm, is considering investing in new technology that allows customers...

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Finance

Bulldog Memorabilia, a small screen printing firm, isconsidering investing in new technology that allows customers todesign their own products online, then they are automaticallyprinted and shipped with only minimal labor costs. The firm hasprojected the following cash flows:
Time0 Time1 Time2 Time3 Time4 Time 5
-2,000,000 450,000 550,000 625,000 600,000 400,000
The firm anticipates selling theequipment for 300,000 (its salvage value) at time 5 and estimatesthe project cost of capital to be 10%. The firm estimates the IRRon the project to be 13.19%
The CFO of Bulldog is not sure that she is accurate in herestimates of the future cash flows and decides to conduct ascenario analysis. She has asked you to recalculate the NPVassuming that each cash flow and the salvage value are 10% higherthan her initial estimate or 10 % lower. How is the estimate of NPVchanged in each case (case1—all cash flows and the salvage valueincrease by 10%, case 2 all cash flows and the salvage valuedecrease by 10%)? Does the range of outcomes change how you wouldview the project? (10 points)

Answer & Explanation Solved by verified expert

3.9 Ratings (415 Votes)

Base case Total cash inflow in Time 5 cash flow salvage value 400000 300000 700000NPV is calculated using NPV See Answer

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Transcribed Image Text

Bulldog Memorabilia, a small screen printing firm, isconsidering investing in new technology that allows customers todesign their own products online, then they are automaticallyprinted and shipped with only minimal labor costs. The firm hasprojected the following cash flows:Time0 Time1 Time2 Time3 Time4 Time 5-2,000,000 450,000 550,000 625,000 600,000 400,000The firm anticipates selling theequipment for 300,000 (its salvage value) at time 5 and estimatesthe project cost of capital to be 10%. The firm estimates the IRRon the project to be 13.19%The CFO of Bulldog is not sure that she is accurate in herestimates of the future cash flows and decides to conduct ascenario analysis. She has asked you to recalculate the NPVassuming that each cash flow and the salvage value are 10% higherthan her initial estimate or 10 % lower. How is the estimate of NPVchanged in each case (case1—all cash flows and the salvage valueincrease by 10%, case 2 all cash flows and the salvage valuedecrease by 10%)? Does the range of outcomes change how you wouldview the project? (10 points)