Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 69

Net Present Value
Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.
a. Southward Manufacturing is considering the purchase of a new welding system. The cash benefits will be $400,000 per year. The system costs $2,250,000 and will last 10 years.
b. Kaylin Day is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $35,000 per year. She estimates that the shop will have a useful life of 6 years.
c. Goates Company calculated the NPV of a project and found it to be $21,300. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $45,000.
Required:
1. Compute the NPV for Southward Manufacturing, assuming a discount rate of 12%. Should the company buy the new welding system?
2. CONCEPTUAL CONNECTION Assuming a required rate of return of 8%, calculate the NPV for Kaylin Day's investment. Should she invest? What if the estimated return was $45,000 per year? Would this affect the decision? What does this tell you about your analysis?
3. What was the required investment for Goates Company's project?