/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q15BP The Horizon Company will invest ... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 4: Q15BP (page 410)

The Horizon Company will invest \(60,000 in a temporary project that will generate the following cash inflows for the next three years.

Year

Cash Flow

1

\)15,000

2

25,000

3

40,000

The firm will also be required to spend $10,000 to close down the project at the end of the three years. If the cost of capital is 10 percent, should the investment be undertaken?

Short Answer

Expert verified

Thebusiness entity must not undertake the project.

Step by step solution

01

Definition of Net Present Value

A technique used under capital budgeting for determining the project鈥檚 profitability by taking the difference between the cash inflows and outflows is known as net present value. This technique considers the concept of the time value of money. Therefore, the present value of each cash flow is calculated.

02

Calculation of Net present Value

Year

Cash flow

PVIF @ 10%

Present value

1

$15,000

0.909

$13,635

2

25,000

0.826

$20,650

3

40,000

0.751

$30,040

Total cash flows
$64,325
Less: Initial investment
($60,000)
Less: present value of close down cost (PVIF: 0.751)
(7,510)
Net present value
($3,185)

The net present value of the investment is negative. Therefore, the Horizon Company must not undertake it.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question:Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent. Compute the price of the stock (P0)


Question:Ecology Labs Inc. will pay a dividend of \(6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent.

a. Compute P0. (For parts b, c, and d in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.)

b. Assume Ke, the required rate of return, goes up to 18 percent. What will be the new value of P0?

c. Assume the growth rate (g) goes up to 9 percent. What will be the new value of P0? Ke goes back to its original value of 14 percent.

d. Assume D1 is \)7.00. What will be the new value of P0? Assume Ke is at its original value of 14 percent and g goes back to its original value of 5 percent.

If you invest $9,000 today, how much will you have b. In 7 years at 12 percent?

Question:Stagnant Iron and Steel currently pays a $12.25 annual cash dividend (D0). The company plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 18 percent, what is the price of the common stock?

You invest $3,000 for three years at 12 percent. b. What is the value of your investment after two years?
See all solutions

Recommended explanations on Business Studies Textbooks

Insurance

Read Explanation

Organizational Communication

Read Explanation

Human 91影视

Read Explanation

Sales in Business

Read Explanation

Family Business

Read Explanation

Public Relations Business Studies

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.