The Following Data Have Been Collected by Capital Budgeting Analysts

question 47

Essay

The following data have been collected by capital budgeting analysts at Halda, Inc.concerning an investment in an expansion of the company's product line.Analysts estimate that an investment of $210,000 will be required to initiate the project at the beginning of 2016.Estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in lump sum at the end of each year.
$$\begin{array} { c c } \text { Year } & \text { Amount of Cash Return } \\2019 & \$ 90,000 \\2020 & 80,000 \\2021 & 70,000 \\2022 & 60,000\end{array}$$
The new product line will also require an investment in working capital of $30,000; this investment will become available for other purposes at the end of the project.Salvage value of machinery and equipment at the end of the product line's life is expected to be $20,000.The cost of capital used in Hilda, Inc.'s capital budgeting analysis is 10%.
(a.)Calculate the net present value of the proposed investment.Ignore income taxes, and round all answers to the nearest $1.
(b.)Calculate the present value ratio of the investment.
(c.)What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
(d.)Calculate the payback period of the investment.

---

Definitions:

Rate of Inflation

The pace at which the overall price level of goods and services increases, diminishing the buying power.

Probability Distribution

A statistical descriptor that comprehensively outlines all viable outcomes and their likelihoods for a random variable within a set boundary.

Expected Holding-Period Return

The total return anticipated on a bond if it is held until the end of its lifetime or holding period, including interest payments and capital gain or loss.

Probability Distribution

An analytical function that describes every probable value and its likelihood for a random variable over a predefined interval.