Asked by zereniah mungate on Jul 12, 2024
Verified
What would the annual net cash inflows from this project have to be in order to justify investing in remodelling?
A) $16,147.
B) $14,495.
C) $29,158.
D) $35,842.
Remodelling
The process of updating or altering the structure, layout, or appearance of an existing building or space.
Discount Rate
The interest rate used to discount future cash flows to their present value, often used in the context of evaluating investments or projects.
Net Cash Inflows
The amount of cash received from operations, investments, and financing activities, minus the cash outflows for the same activities.
- Adopt net present value (NPV) and internal rate of return (IRR) methods in evaluating potential investments.
- Evaluate the consequences of working capital alterations on cash flows associated with investments.
- Gain an understanding of the importance of the discount rate in relation to the time value of money.
Verified Answer
BB
Bineta BarryJul 17, 2024
Final Answer :
C
Explanation :
The annual net cash inflows can be calculated using the formula: Annual net cash inflows = (Total annual cash inflows) - (Total annual cash outflows)
Total annual cash inflows = Sales revenue + salvage value of equipment
Total annual cash outflows = Annual operating expenses - Depreciation
To calculate the annual net cash inflows, we need to calculate each component of the formula:
Total annual cash inflows:
Sales revenue = Let's assume it to be X
Salvage value of equipment = $10,000
Total annual cash inflows = X + $10,000
Total annual cash outflows:
Annual operating expenses = We are not given this information, so let's assume it to be Y
Depreciation = (Remodelling cost - salvage value of equipment) / useful life
= ($120,000 - $10,000) / 10
= $11,000
Total annual cash outflows = Y + $11,000
Putting it all together, we get:
Annual net cash inflows = (X + $10,000) - (Y + $11,000)
The project will be justified if the annual net cash inflows are greater than or equal to the initial investment of $120,000 + $30,000 = $150,000 divided by the annuity factor of 16% for 10 years which is 4.037.
So, $150,000/4.037 = $37,156.
Therefore, X - Y = $37,156
Choice C is the closest option to this value, with annual net cash inflows of $29,158. This would result in a positive net present value and would justify investing in the remodelling.
Total annual cash inflows = Sales revenue + salvage value of equipment
Total annual cash outflows = Annual operating expenses - Depreciation
To calculate the annual net cash inflows, we need to calculate each component of the formula:
Total annual cash inflows:
Sales revenue = Let's assume it to be X
Salvage value of equipment = $10,000
Total annual cash inflows = X + $10,000
Total annual cash outflows:
Annual operating expenses = We are not given this information, so let's assume it to be Y
Depreciation = (Remodelling cost - salvage value of equipment) / useful life
= ($120,000 - $10,000) / 10
= $11,000
Total annual cash outflows = Y + $11,000
Putting it all together, we get:
Annual net cash inflows = (X + $10,000) - (Y + $11,000)
The project will be justified if the annual net cash inflows are greater than or equal to the initial investment of $120,000 + $30,000 = $150,000 divided by the annuity factor of 16% for 10 years which is 4.037.
So, $150,000/4.037 = $37,156.
Therefore, X - Y = $37,156
Choice C is the closest option to this value, with annual net cash inflows of $29,158. This would result in a positive net present value and would justify investing in the remodelling.
Learning Objectives
- Adopt net present value (NPV) and internal rate of return (IRR) methods in evaluating potential investments.
- Evaluate the consequences of working capital alterations on cash flows associated with investments.
- Gain an understanding of the importance of the discount rate in relation to the time value of money.