The Law Offices of Nguyen and Kline Would Like to Open

question 45

Essay

The Law Offices of Nguyen and Kline would like to open an office for six years in New Mexico.The initial investment required to purchase an office building is $2,600,000,and Nguyen and Kline needs $75,000 in working capital for the new office.Working capital will be released back to the company at the end of six years.Nguyen and Kline expects to remodel the office at the end of 4 years at a cost of $250,000.Annual net cash receipts from daily operations (cash receipts minus cash payments)are expected to be as follows:
$$\begin{array} { r r } \text { Year 1: } & \$ 560,000 \\\text { Year 2: } & \$ 580,000 \\\text { Year 3: } & \$ 620,000 \\\text { Year 4: } & \$ 750,000 \\\text { Year 5: } & \$ 960,000 \\\text { Year 6: } & \$ 1,100,000\end{array}$$
Although the company's cost of capital is 7 percent,management set a required rate of return of 13 percent due to the high risk associated with this project.
(Use the following factors for your solutions. )
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Factors: Present Value of } \$ 1$

$\begin{array}{ccccccccccc}\text{r=Year}&7\%&8\%&9\%&10\%&11\%&12\%&13\%&14\%&15\%&18\%&20\%\\0& 1.0000 & 1.0000& 1.0000& 1.0000&1.0000 &1.0000 &1.0000 &1.0000 &1.0000 &1.0000 &1.0000 \\1& 0.9346 & 0.9259 & 0.9174 & 0.9091 & 0.9009 & 0.8929 & 0.8850 & 0.8772 & 0.8696 & 0.8475 & 0.8333 \\2& 0.8734 & 0.8573 & 0.8417 & 0.8264 & 0.8116 & 0.7972 & 0.7831 & 0.7695 & 0.7561 & 0.7182 & 0.6944 \\3& 0.8163 & 0.7938 & 0.7722 & 0.7513 & 0.7312 & 0.7118 & .6931 & 0.6750 & 5313 & 0.6086 & 0.5787\\4& 0.7629 & 0.7350 & 0.7084 & 0.6830 & 0.6587 & 0.6355 & 6133 & 0.5921 & .2397 & 0.5158 & 0.4823\\5& 0.7130 & 0.6806 & 0.6499 & 0.6209 & 0.5935 & 0.5674 & 0.5428 & 0.5194 & .8897 & 0.4371 & 0.4019 \\6&0.6663 & 0.6302 & 0.5963 & 0.5645 & 0.5346 & 0.5066 & 0.4803 & 0.4556 & 4.4859 & 0.3704 & 0.3349\\ 7&0.6227 &0.5835 &0.5470 &0.5132 &0.4817 &0.4523 &0.4251 &0.3996 &5.0330 &0.3139 &0.2791\\\end{array}$
(1)Calculate the net present value (NPV)of this investment.
(2)Use trial and error to approximate the internal rate of return (IRR)for this investment proposal.
(3)Based on the analyses in (1)and (2),should Nguyen and Kline open the new office? Explain.

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