Net Present Value
Use Exhibit 12B.1 and Exhibit 12B.2 to locate the present valueof an annuity of $1, which is the amount to be multiplied times thefuture annual cash flow amount.
Each of the following scenarios is independent. Assume that allcash flows are after-tax cash flows.
- Campbell Manufacturing is considering the purchase of a newwelding system. The cash benefits will be $480,000 per year. Thesystem costs $3,050,000 and will last 10 years.
- Evee Cardenas is interested in investing in a women's specialtyshop. The cost of the investment is $230,000. She estimates thatthe return from owning her own shop will be $50,000 per year. Sheestimates that the shop will have a useful life of 6 years.
- Barker Company calculated the NPV of a project and found it tobe $63,900. The project's life was estimated to be 8 years. Therequired rate of return used for the NPV calculation was 10%. Theproject was expected to produce annual after-tax cash flows of$135,000.
Required:
1. Compute the NPV for Campbell Manufacturing,assuming a discount rate of 12%. If required, round all presentvalue calculations to the nearest dollar. Use the minus sign toindicate a negative NPV.
$
Should the company buy the new welding system?
No
2. Conceptual Connection: Assuming a requiredrate of return of 8%, calculate the NPV for Evee Cardenas'investment. Round to the nearest dollar. If required, round allpresent value calculations to the nearest dollar. Use the minussign to indicate a negative NPV.
$
Should she invest?
Yes
What if the estimated return was $135,000 per year? Calculatethe new NPV for Evee Cardenas' investment. Would this affect thedecision? What does this tell you about your analysis? Round to thenearest dollar.
$
The shop should now  be purchased. This reveals thatthe decision to accept or reject in this case is affected bydifferences in estimated returns
3. What was the required investment for BarkerCompany's project? Round to the nearest dollar. If required, roundall present value calculations to the nearest dollar.
$
