Acct306 Homework Ch21 - CHAPTER 21 CAPITAL BUDGETING AND...

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CHAPTER 21 CAPITAL BUDGETING AND COST ANALYSIS 21-30 NPV, IRR and sensitivity analysis. 1. Net Present Value of project: Period 0 1 – 10 Cash inflows $28,000 Cash outflows $(62,000) (18,000) Net cash flows $(62,000) $ 10,000 Annual net cash inflows $ 10,000 Present value factor for annuity, 10 periods, 8% × 6.71 Present value of net cash inflows $67,100 Initial investment (62,000) Net present value $ 5,100 For a $62,000 initial outflow, the project now generates $10,000 in cash flows at the end of each of years one through ten. Using either a calculator or Excel, the internal rate of return for this stream of cash flows is found to be 9.79%. 2. If revenues are 10% higher, the new Net Present Value will be: Period 0 1 – 10 Cash inflows $30,800 Cash outflows $(62,000) (18,000) Net cash inflows $(62,000) $12,800 Annual net cash inflows $12,800 Present value factor for annuity, 10 periods, 8% × 6.71 Present value of net cash inflows $85,888 Initial investment (62,000) Net present value $23,888 For a $62,000 initial outflow, the project now generates $12,800 in cash flows at the end of each of years one through ten. Using either a calculator or Excel, the internal rate of return for this stream of cash flows is found to be 15.94%.
If revenues are 10% lower, the new net present value will be: Period 0 1 – 10 Cash inflows $25,200 Cash outflows $(62,000) (18,000) Net cash inflows $(62,000) $ 7,200 Annual net cash inflows $ 7,200 Present value factor for annuity, 10 periods, 6% x 6.71 Present value of net cash inflows $ 48,312 Initial investment (62,000) Net present value $ (13,688) For a $62,000 initial outflow, the project now generates $7,200 in cash flows at the end of each of years one through ten. Using either a calculator or Excel, the internal rate of return for this stream of cash flows is found to be 2.82%. 3. If both revenues and costs are higher, the new Net Present Value will be: Period 0 1 – 10 Cash inflows $30,800 Cash outflows $(62,000) (19,260) Net cash inflows $(62,000) $11,540 Annual net cash inflows $ 11,540 Present value factor for annuity, 10 periods, 6% × 6.71 Present value of net cash inflows $77,433 Initial investment (62,000) Net present value $15,433 For a $62,000 initial outflow, the project now generates $11,540 in cash flows at the end of each of years one through ten. Using either a calculator or Excel, the internal rate of return for this stream of cash flows is found to be 13.25%.

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