Use the NPV method to determine whether Hawkins Products should invest in the
• Project A: Costs $285,000 and offers seven annual net cash inflows of $55,000. Hawkins Products requires an annual return of 14% on investments of this nature.
• Project B: Costs $395,000 and offers 10 annual net cash inflows of $77,000. Hawkins Products demands an annual return of 12% on investments of this nature.
1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places.
2. What is the maximum acceptable price to pay for each project?
3. What is the profitability index of each project? Round to two decimal places.
NPV Project A: $235,840
NPV Project B: $435,065
PI Project A: 0.83
PI Project B: 1.10
For project A
For project B
The maximum price of the projects is the value at which there is neither any profit nor any loss. This would be possible when the net present value of each project would be equal to its initial investment value.
Based on this,
The maximum price for project A = $235,840
The maximum price for project B = $435,265
Using ARR to make capital investment decisions Refer to the Henry Hardware information in Exercise E26-20. Assume the project has no residual value. Compute the ARR for the investment. Round to two places.
Henry Hardware is adding a new product line that will require an investment of $1,512,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $310,000 the first year, $270,000 the second year, and $240,000 each year thereafter for eight years.
Outlining the capital budgeting process Review the following activities of the capital budgeting process: a. Budget capital investments. b. Project investments’ cash flows. c. Perform post-audits. d. Make investments. e. Use feedback to reassess investments already made. f. Identify potential capital investments. g. Screen/analyze investments using one or more of the methods discussed. Place the activities in sequential order as they occur in the capital budgeting process.
Using NPV to make capital investment decisions Holmes Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $910,000.
Year 1 $ 262,000
Year 2 254,000
Year 3 222,000
Year 4 215,000
Year 5 200,000
Year 6 175,000
Holmes could refurbish the equipment at the end of six years for $104,000. The refurbished equipment could be used one more year, providing $77,000 of net cash inflows in year 7. Additionally, the refurbished equipment would have a $55,000 residual value at the end of year 7. Should Holmes invest in the equipment and refurbish it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)
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