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Nata [24]
3 years ago
8

Hunt Inc. intends to invest in one of two competing types of computer-aided manufacturing equipment: CAM X and CAM Y. Both CAM X

and CAM Y models have a project life of 10 years. The purchase price of the CAM X model is $3,600,000, and it has a net annual after-tax cash inflow of $900,000. The CAM Y model is more expensive, selling for $4,200,000, but it will produce a net annual after-tax cash inflow of $1,050,000. The cost of capital for the company is 10%.
Required:
Calculate the NPV for each project.
Business
1 answer:
timofeeve [1]3 years ago
7 0

Answer:

NPV of CAM X = $1,930,110.40

NPV of CAM Y = $2,251,795.46

Explanation:

The NPV for each project can be calculated using the following steps:

<u>Step 1: Calculation of present value (PV) for each project</u>

The PV for each project can be calculated using the formula for calculating the present value of an ordinary annuity as follows:

PV of a project = P * [{1 - [1 / (1 + r)]^n} / r] …………………………………. (1)

Where;

<u>For CAM X</u>

P = Net annual after-tax cash inflow = $900,000

r = Cost of capital or interest rate = 10%, or 0.10

n = number of project life = 10

Substitute the values into equation (1) to have:

PV of CAM X = $900,000 * [{1 - [1 / (1 + 0.10)]^10} / 0.10]

PV of CAM X = $900,000 * 6.14456710570468

PV of CAM X = $5,530,110.40

<u>For CAM Y</u>

P = Net annual after-tax cash inflow = $1,050,000

r = Cost of capital or interest rate = 10%, or 0.10

n = number of project life = 10

Substitute the values into equation (1) to have:

PV of CAM Y = $1,050,000 * [{1 - [1 / (1 + 0.10)]^10} / 0.10]

PV of CAM Y = $1,050,000 * 6.14456710570468

PV of CAM Y = $6,451,795.46

<u>Step 2: Calculation of net present value (NPV) for each project</u>

The NPV for each project can be calculated using the following formula:

NPV of each project = PV of each equipment - Purchase price of each equipment ........ (2)

Using equation (2), we have:

NPV of CAM X =  PV of CAM X - Purchase price of CAM X = $5,530,110.40 - $3,600,000 = $1,930,110.40

NPV of CAM Y = PV of CAM Y - Purchase price of CAM Y = $6,451,795.46 - $4,200,000 = $2,251,795.46

Additional Note:

Although this not part of the requirement of the question, but note that the final decision is that since the positive NPV of $2,251,795.46 for CAM Y is gereater than the positive NPV of $1,930,110.40 for CAM X, Hunt Inc. will choose to invest in CAM Y.

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Answer:

Since the requirements are missing, I believe that you need the adjusting entries:

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2. At the end of January, $3,500 of accounts receivable are past due, and the company estimates that 50% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 2% will not be collected. The note receivable of $18,000 is considered fully collectible and therefore is not included in the estimate of uncollectible accounts.

Dr Bad debt expense 6,250

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3. Accrued interest revenue on notes receivable for January.

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4. Unpaid salaries at the end of January are $33,100.

Dr Salaries expense 33,100

    Cr Salaries payable 33,100

5. Accrued income taxes at the end of January are $9,500

Dr Income tax expense 9,500

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