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Should the company buy the new welding system

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Reference no: EM132701736

Problem - Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.

a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,700,000 and will last 10 years.

b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $270,000. She estimates that the return from owning her own shop will be $52,500 per year. She estimates that the shop will have a useful life of 6 years.

c. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000.

Required -

1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. Should the company buy the new welding system?

2. Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas' investment. Should she invest? What if the estimated return was $135,000 per year? Would this affect the decision? What does this tell you about your analysis?

3. What was the required investment for Barker Company's project?

Reference no: EM132701736

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