Question

McFann Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:

Answer 1

Answer:

a. $82,622

Explanation:

Base on the scenario been described in the question, first we have find the net cash flows for one to four years which we have as follows

net cash flows = [(total revenue - total costs) x (1 - tax rate)] + depreciation expense

CF1 = [($234,135 - $125,565 - $66,750 - $3,300) x (1 - 40%)] + $3,300

CF1= $26,412

CF2 = [($226,460 - $119,444 - $68,950 - $4,500) x (1 - 40%)] + $4,500

CF2= $24,640

CF3 = [($255,132 - $133,665 - $69,690 - $1,500) x (1 - 40%)] + $1,500

CF3= $31,666

CF4 = [($272,318 - $138,923 - $68,900 - $700) x (1 - 40%)] + $700

CF4= $38,977

To obtain our NPV can use the method

NPV = -10,000 + 26,412/1.11 + 24,640/1.11² + 31,666/1.11³ + 38,977/1.11⁴ = -10,000 + 23,795 + 19,998 + 23,154 + 25,675

NPV= $82,622

So option A. Is our answer

Answer 2

Answer:

A) $82,622

Explanation:

first we must determine the net cash flows for years 1-4:

net cash flows = [(total revenue - total costs) x (1 - tax rate)] + depreciation expense

1. CF1 = [($234,135 - $125,565 - $66,750 - $3,300) x (1 - 40%)] + $3,300 = $26,412
2. CF2 = [($226,460 - $119,444 - $68,950 - $4,500) x (1 - 40%)] + $4,500 = $24,640
3. CF3 = [($255,132 - $133,665 - $69,690 - $1,500) x (1 - 40%)] + $1,500 = $31,666
4. CF4 = [($272,318 - $138,923 - $68,900 - $700) x (1 - 40%)] + $700 = $38,977

now we can calculate the project's NPV:

NPV = -10,000 + 26,412/1.11 + 24,640/1.11² + 31,666/1.11³ + 38,977/1.11⁴ = -10,000 + 23,795 + 19,998 + 23,154 + 25,675 = $82,622