Reference no: EM132874626
Problem 1 - Wise Company is considering an investment that requires an outlay of $600,000 and promises an after-tax cash inflow of $693,000 one year from now. The company's cost of capital is 10%.
Required - Break the $693,000 future cash inflow into three components: (a) the return of the original investment, (b) the cost of capital, and (c) the profit earned on the investment. Now compute the present value of the profit earned on the investment.
Problem 2 - Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 1. What does this tell you about the meaning of NPV?
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.
a. Thomas Company is investing $120,000 in a project that will yield a uniform series of cash inflows over the next 4 years.
b. Video Repair has decided to invest in some new electronic equipment. The equipment will have a 3-year life and will produce a uniform series of cash savings. The NPV of the equipment is $1,750, using a discount rate of 8%. The IRR is 12%.
c. A new lathe costing $60,096 will produce savings of $12,000 per year.
d. The NPV of a project is $3,927. The project has a life of 4 years and produces the following cash flows:
Unstyled tableYear 1$10,000Year 3$15,000Year 2$12,000Year 4?
The cost of the project is two times the cash flow produced in Year 4. The discount rate is 10%.
Required - If the internal rate of return is 14% for Thomas Company, how much cash inflow per year can be expected?