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1. Finally, use NPV (Net Present Value) method to rank the investment proposals and select the most appropriate one to pursue. What is the most challenging aspect of the NPV method? (Please identify all the variables you use in your calculation when you use a calculator. Ignore all CCA effect on cash flow).
Investment proposal #1 - adding 5 trucks
Initial expenditure
Year 1
Year 2
Year 3
Year 4
Year 5
Net cost of trucks
$ 300,000
Additional Revenue
$ 44,000
$ 76,000
$ 112,000
225,000
$168,000
Additional cost
(11,000)
Amortization
(45,000)
(66,000)
(63,000)
Net increase in income
(12,000)
(1,000)
38,000
151,000
94,000
Less: Tax at 33%
0
(12,540)
(49,830)
(31,020)
Increase in after-tax income
25,460
101,170
62,980
Add back amortization
45,000
66,000
63,000
Net change in cash flow
$(300,000)
$33,000
$65,000
$88,460
$164,170
$125,980
The second proposal is to purchase a more advanced wood crafting machine. The projected revenues and costs and changes in net cash flow are summarized in the table below:
Investment proposal #2 - adding a wood crafting machine:
$ 700,000
$ 87,000
$ 175,000
$ 262,000
393,000
$325,000
(26,000)
(17,000)
44,000
132,000
219,000
350,000
282,000
(14,520)
(43,560)
(72,270)
(115,500)
(93,060)
29,480
88,440
146,730
234,500
188,940
17,000
$(700,000)
$46,480
$105,440
$163,730
$251,500
$205,940
The third proposal is to add a new production line making new type of baby furniture. The projected increased revenues and costs and net changes in cash flows are summarized in the table below:
Investment proposal #3 - adding a new product line:
$ 510,000
$ 381,000
$ 310,000
$70,000
$ 51,000
(19,000)
(25,000)
(31,000)
(38,000)
(76,000)
(112,000)
(107,000)
286,000
179,000
(68,000)
(94,000)
(94,380)
(59,070)
191,620
119,930
76,000
112,000
107,000
$(510,000)
$267,620
$231,930
$62,000
$39,000
$13,000
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