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- Posted on: Tue 17 Dec, 2013
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FIN 571 Quiz

The following are workout problems from the text and I need to know if I am doing them correctly. The first one I am not sure if my results are wrong due to rounding.

1). Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $2,109,194. have a life of five years, and would produce the cash flows shown in the following table.

Year Cash Flow

1 $513,316

2 -225,749

3 1,000,114

4 849,873

5 758,037

What is the NPV if the discount rate is 13.74 percent? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

Here is my attempt to solve the problem:

Cost of equipment-$2,109,194

Length of project= n=5 years

Required rate of return= k=13.74%

NPV=

=-$2,109,194+513,316-225,749+1,000,114+849,873+758,037

(1.1374)¹ (1.1374)² (1.1374)³ (1.1374) (1.1374)

=-$2,109,194+451,306.49-174,512.21+679,702.32+507,811.30+398,233.25= =-246 671 or -24.67 (both were marked incorrect)

=-246 671 or -24.67 (This is what I came up with the third time)

(1.1374)²=1.2936

(1.1374)³=1.4714

(1.1374) 4=1.6736

(1.1374) 5=1.9035

Next problem:

Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. This investment will consist of $2.30 million for land and $9.70 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.21 million, $2.40 million above book value. The farm is expected to produce revenue of $2.08 million each year, and annual cash flow from operations equals $1.98 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

NPV=$

Should this project be accepted or rejected?

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