All papers examples
Paper Types
Disciplines

# Harriman Manufacturing Company, Math Problem Example

Pages: 3

Words: 707

Math Problem

a) –Calculate the expected net cash outlay (the amount of the capital investment) at the beginning of the first year.

Initial Cash Outlay = Purchase Price + Direct Expenses + Capital Expenditures

= \$50,000 + \$10,000 + 0

= \$60,000

b) – Estimate the net operating cash flows in years 1, 2 and 3, and assume they occur at the end of each year.

The net operating cash flow can be found with the capital budgeting process. Below mentioned chart analyze the whole thing in detail

 Worksheet for Computation of Cash Flow Year 1 Year 2 Year 3 Year 4 Investment Y 60,000 Depreciation 19,800 22,110 15,376.50 2,523.56 Adjusted Basis of Machine 40,200 18,090 2,713.50 189.95 Inventory 3,000 3,000 3,000 3,000 Non Interest Bearing 1,000 1,000 1,000 1,000 Cost Saving 20,000 20,000 20,000 20,000 Revenue 20,000 20,000 20,000 20,000 Tax Rate 8,000 8,000 8,000 8,000 Net Income 12,000 12,000 12,000 12,000 Add: Depreciation 19,800 22,110 15,377 2,524 Cash Inflow 31,800 34,110 27,377 14,524

The depreciation has been computed with the help of MACRS and in the end it added back in the net income to arrive on cash inflow.

c) – What is the dollar value of the non-operating net cash terminal value (i.e., Salvage Value) during the fourth year?

The salvage as well as gain from selling is mentioned below in the table

 Terminal Value Computation Total Value Salvage Value 60,000 2,523 Selling Price 20,000 Gain from Selling 17,477

d) – If Harriman’s weighted average cost of capital (required rate of return) is 10%, what are the investment’s Net Present Value, Internal Rate of Return, and Simple Payback Period? Should the investment be made?

Net Present Value Computation

Net Present Value (hereafter NPV) is the most widely used tool to assess the economic compatibility of a particular project. Basically the NPV which is also called Net Present worth (NPW) is a time series of cash flows which are both ingoing and outgoing is called NPV. Basically it is the sum of all the present values of the individual cash flows (Edwin & Ruud, 2000). NPV is very useful in the world of finance and has been counted as the central tool to appraise the long term projects with the help of discounted cash flow techniques and time value of money factor.

 Net Present Value @ 10% WACC Initial Outlay (60,000) Year Undiscounted Cash Flow Discounted @ 10% 1 31,800 28,909 2 34,110 28,190 3 27,377 20,568 9,920 PV 87,587 Less: Initial Outlay 60,000 NPV 27,587

Decision: As the NPV is in positive, then the company should take this project.

Internal Rate of Return

Internal Rate of Return (IRR) is another widely used tool to analyze a company or project before taking it. IRR is the rate on which the NPV of the project becomes zero. If the computed IRR comes out greater than the discount or hurdle rate then the project should be taken.

 IRR Undiscounted Discounted Year -60000 -60000 1 31,800 28,909 2 34,110 28,190 3 27,377 20,568 4 14,524 9,920 IRR 32% 20%

Decision: As the WACC of the company is 10% and computed IRR is 20%, the company should select the same.

Simple Payback Period

This analyze in how much time the company overcome the initial cost of the project.

 Payback Analysis Undiscounted Discounted Year -60000 -60000 1 31,800 28,909 2 34,110 28,190 3 27,377 20,568 4 14,524 9,920 1.07 Years 3.29 Years

The payback period is also good, hence all of the things are in favor of the company; hence the company should invest in this project.

References

Edwin, J & Ruud, T (2000). Project Management & Analysis. New York: McGraw Hill Publications

Fisk, P. (2006). Project Management: An Introductory Review. London: John Wily & Sons Professional Publications.

Time is precious

don’t waste it!

Get instant essay
writing help!

Plagiarism-free
guarantee

Privacy
guarantee

Secure
checkout

Money back
guarantee

### Exponential Smoothing, Math Problem Example

Exponential Smoothing

Pages: 1

Words: 30

### What Percentage of Costs Are Variable? Math Problem Example

What percentage of costs are variable? How does volume affect variable costs? Variable costs change according to the proportion of the amount of goods or [...]

Pages: 3

Words: 709

### The Mathematics Behind the Rubik’s Cube, Math Problem Example

Rubik’s cube is a puzzle which has three planes which was invented by Ern? Rubik in 1974. Ern? Rubik was respected as a professor of [...]

Pages: 22

Words: 5972

### Mathematics Unit 4 Db, Math Problem Example

The most recent annual inflation of Kenya is approximately 3.9 %( the last update by Otieno 2010). The currency in Kenya is Kenyan Shillings. Taking [...]

Pages: 1

Words: 144

### Library Research Assignment, Math Problem Example

Part one There are different kinds of owls with various sizes. Some are small and others are big depending from where they come. An example [...]

Pages: 1

Words: 271

### Springfield Express, Math Problem Example

During the past few decades, there has been a renewed interest in the amplification of the passenger railroad serviced in various parts of the United [...]

Pages: 6

Words: 1552

### Exponential Smoothing, Math Problem Example

Exponential Smoothing

Pages: 1

Words: 30

### What Percentage of Costs Are Variable? Math Problem Example

What percentage of costs are variable? How does volume affect variable costs? Variable costs change according to the proportion of the amount of goods or [...]

Pages: 3

Words: 709

### The Mathematics Behind the Rubik’s Cube, Math Problem Example

Rubik’s cube is a puzzle which has three planes which was invented by Ern? Rubik in 1974. Ern? Rubik was respected as a professor of [...]

Pages: 22

Words: 5972

### Mathematics Unit 4 Db, Math Problem Example

The most recent annual inflation of Kenya is approximately 3.9 %( the last update by Otieno 2010). The currency in Kenya is Kenyan Shillings. Taking [...]

Pages: 1

Words: 144

### Library Research Assignment, Math Problem Example

Part one There are different kinds of owls with various sizes. Some are small and others are big depending from where they come. An example [...]

Pages: 1

Words: 271

### Springfield Express, Math Problem Example

During the past few decades, there has been a renewed interest in the amplification of the passenger railroad serviced in various parts of the United [...]

Pages: 6

Words: 1552