Required net after tax annual cash inflow 6000 5019 Required net after tax

# Required net after tax annual cash inflow 6000 5019

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Required net after-tax annual cash inflow (\$6,000 ÷ 5.019) Required net after-tax annual cash revenue (\$1,195 \$210) Before-tax annual cash revenue needed to earn an IRR of 15% (\$985 ÷ (1 0.35))

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Problem 12-40: NPV, Sensitivity Analysis Background Griffey & Son operate a plant in Cincinnati and are considering o will be \$3,500,000 and shold produce after-tax net cash inflows o effects of the ocean air in Seattle, however, the plant's useful life Problem Information Initial outlay \$3,500,000 After-tax net cash inflows \$600,000 Original estimate, investment life (years) 15 Plant’s useful life (i.e., alternative estimate) 12 Cost of capital 14% PV annuity factor, 15 years, 14% 6.1420 PV annuity factor, 12 years, 14% 5.6600 Requirements 1. Will the project be accepted if 15 years’ useful life is assumed? 2. How many years will be needed for the Seattle facility to earn at Solution Less: Initial Investment Outlay = NPV of proposed investment = Since NPV > \$0, the investment should be undertaken. 1. NPV of proposed investment, assuming 15-year life : PV of after-tax cash inflows = \$600,000 × 6.142 = NPV of proposed investment assuming a 12-year life: PV of Future Cash Inflows = \$600,000 × 5.660 =
Less: Initial Investment Outlay = NPV of proposed investment = Since NPV < \$0, the investment should not be undertaken. 2. We are given annual after-tax cash inflows of \$600,000 and an of exactly 14%, the following must hold: = = annuity factor, at 14%, approximates a 13-year life (see Append PV of Future Cash Inflows \$600,000 × A n,14% Thus, we need to solve for the particular n that balances the pr Seattle facility to earn at least a 14% return is approximately 13

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opening a new facility in Seattle. The initial outlay of \$600,000 per year for 15 years. Due to the may be only 12 years. Cost of capital is 14%. (from Appendix C, Table 2) (from Appendix C, Table 2) What if 12 years of useful life is used? t least a 14 percent return? \$3,685,200 \$3,500,000 \$185,200 \$3,396,000

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\$3,500,000 (\$104,000) n initial investmen outly of \$3,500,000. To generate an IRR Initial Investment Outlay \$3,500,000 dix C, Table 2). Therefore, the number of years needed for the receding equation. A n,14% = \$3,500,000 ÷ \$600,000 = 5.833. This 3 years .

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Exercise 12-41: Uneven Cash Flows , NPV, Sensitivity Analysis Background MaxiCare Corporation, a not-for-profit organziation, speacializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in the inner city of large metropolises. For a new facility, initial cash outlays for leas renovations, working capital, training, and other costs are expected to b about \$15 million in year 0. The corporation expects the cash inflows o each new facility in its first year of operation to equal the total cash outl for the year. Net cash inflows are expected to increase to \$1 million in e years 2 and 3, \$2.5 million in year 4, and \$3 million in each of years 5 t 10. The lease agreement for the facility will expire at the end of year 10 MaxiCare expects the cost to close a facility will pretty much exhaust a proceeds from the disposal. Cost of capital for MaxiCare is 12 percent.

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