Case 2514 Present value tables are needed Simms Manufacturin

Case 25.14 (Present value tables are needed.) Simms Manufacturing is considering two alternative investment proposals with the following data Proposal X $620,000 8 years Proposal1Y $400,000 8 vears Investment Useful life Estimated annual net cash inflows Residual value Depreciation method Required rate of return $130,000 $60,000 Straight-line 14% $80,000 $0 Straight-line 10% 1) Refer to Case 25.14. What is the total present value of future cash inflows from Proposal Y? 2) Refer to Case 25.14. What is the total present value of future cash inflows from Proposal X? 3) Refer to Case 25.14. What is the net present value of Proposal Y? 4) Refer to Case 25.14. What is the net present value of Proposal X? 5) Refer to Case 25.14. Using the net present value model, which alternative should Simms select, and why?

Solution

1) Total present value of cash inflows from Proposal Y

= [Annual Cash Inflows*PVAF(10%,8 yrs)]+[Residual Value*PVF(10%,8 yrs)]

= ($80,000*5.335)+($0*0.467) = $426,800+$0 = $426,800

2) Total present value of cash inflows from Proposal X

= [Annual Cash Inflows*PVAF(14%,8 yrs)]+[Residual Value*PVF(14%,8 yrs)]

= ($130,000*4.639)+($60,000*0.351) = $603,070+$21,060 = $624,130

3) Net Present Value of Proposal Y = PV of cash inflows - Investment

= $426,800 - $400,000 = $26,800

4) Net Present Value of Proposal X = PV of cash inflows - Investment

= $624,130 - $620,000 = $4,130

5) Using the net present value model, Simms should select Proposal Y because the net present value of Proposal Y($26,800) is more than net present value of Proposal X($4,130).