Bacon Signs plans a major retooling of their manufacturing plant. The equipment has an initial capital cost of $5,000,000 but would increase operating cash flow by $1,500,000 each year for five years
The equipment could be sold for a net cash flow of $1,000,000 in five years. If the hurdle rate is 14%, and the permanent increase in working capital is $500,000, should the firm purchase the equipment?
What will be an ideal response?
Answer: Yes, purchase the equipment because it has a positive NPV of $168,990. (The IRR of 15.18% is greater than the hurdle rate of 14 %.)
Year 0 1 2 3 4 5
Initial
Investment -$5,000,000
Change in
NWC -$500,000
Net Operating
Cash Flow $1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000
Salvage Value $1,000,000
Net Cash Flow -$5,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000 $2,500,000
PVCF $1,315,789 $1,154,201 $1,012,457 $888,120 $1,298,422
NPV $168,990
NPV = PV cash inflows - initial net cash flow
= CF ∗ - initial net cash flow
= $1,500,000 ∗ + - $5,500,000 = $168,990.
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Seller Smith employed Broker Jones under an open listing. While Broker Jones was discussing Smith's property with Prospective Buyer Ford, the broker indicated that the roof was in good condition and did not leak. In fact, Seller Smith had instructed Broker Jones to explain to all prospective buyers that the roof was old and would have to be replaced. After purchasing the property, Buyer Thomas discovered a severe leak in the roof. The buyer, seeking relief, would most logically sue:
A: The broker alone, for contract rescission; B: Both the broker and the seller, for specific performance; C: The broker alone, for damages for breach of warranty of authority; D: The seller and the broker, for damages and fraud.
Cost of goods sold is equal to beginning inventory plus the net cost of purchases minus _________________________
Fill in the blank(s) with correct word