1. Devon Corporation uses a discount rate of 8% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of -P496,541. This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.
Requirements:
- Ignoring any salvage value, how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive? Round-off the PV factor to 5 decimal places
- Ignoring any cash flows from intangible benefits, how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive? Round-off the PV factor to 5 decimal places
Requirements for Carbide Company
- What is the project’s net present value if the required rate of return is 14 percent? Round-off the PV factor to 5 decimal places
- Is the project acceptable?
3. Serkin Corporation is considering an investment in a new product line. The investment would require an immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in working capital. The investment is expected to generate a net cash inflow of $100,000 in year 1, $150,000 in year 2, and $200,000 in years 3 and 4. The equipment would be scrapped (for no salvage) at the end of the fourth year and the working capital would be liquidated. The equipment would be fully depreciated by the straight-line method over its four-year life.
- Refer to Serkin Corporation. If Serkin uses a discount rate of 16 percent, what is the NPV of the proposed product line investment? Round off the PV factor to 4 decimal places.
- Refer to Serkin Corporation. What is the payback period for the investment in years?
Extracted text: Carbide Chemical Company is considering the replacement of two old machines with a new, more efficient machine. It has determined that the relevant after-tax incremental operating cash flows of this replacement proposal are as follows: END OF YEAR 1 2 Cash flows -P404,424 P86,890 P106,474 P91,612 END OF YEAR 4 7 Cash flows P84,801 P84,801 P75,400 P66,000 P92,400