The questions revolve around calculating present worth of costs and present value of net cash flows for different phases of a project, and evaluating if the company makes a minimum 25% return on investment.
The student is asking several questions related to the calculation of the present worth, present value of net cash flow, and evaluating investment returns for different phases of a project.
To calculate these values, we need to apply the formulas for present value (PV) and present worth considering a given interest rate.
To answer these questions, one would normally use the formula PV = C / (1 + i)^n, where C is the future cash flow, i is the interest rate, and n is the number of periods until the payment or receipt of the cash flow.
However, since the interest rate is not provided in the question, we can't perform the exact calculations.
Instead, we can explain the process and give an example using an assumed interest rate.
For example, if the interest rate is 15%, the present worth of a $750,000 one-time material cost paid at the end of the first year would be calculated as PV = $750,000 / (1 + 0.15)^1.
For a labor cost of $2,500,000 paid at the end of each year for 3 years, the present value would be the sum of each individual year's present value.
Assuming an interest rate of 15%, the calculation would involve finding the PV for each of the three years and then summing those values.
To find the annual net cash flow in phase 2, you subtract the sum of the costs from the annual income.
With the annual income as a result of sales being $15,500,000 and the costs being the sum of launch, insurance, labor, and material expenses, you would calculate the net cash flow as $15,500,000 - ($6,500,000 + $640,000 + $1,700,000 + $800,000).
The present value of a series of future cash flows can be calculated using the formula for the present value of an annuity if the net cash flow is constant throughout the period.
Lastly, to evaluate the 25% return on investment, one would compare the present values of all cash flows to the initial investment, adjusting for the desired rate of return.
Question:
1. Phase 1 of the project has a material cost of $750000 paid at the end of first year only. What is the present worth of the material cost of phase 1 (evaluated at the beginning of the first year)?
2. Phase 1 of the project has a labor cost of $2500000 per year paid at the end of each year. What is the present worth of the labor cost of phase 1 (evaluated at the beginning of the first year)? Note that phase 1 is 3 years.
3. Phase 2 of the project has the following costs, all paid at the end of each year:
Launch $6500000
Insurance $640000
Labor $1700000
Material $800000
What is the annual net cash flow in phase 2 if the annual income as a result of sales in phase 2 is $15500000
Hint: Annual net cash flow is the difference between the annual income and annual costs
4. If the annual net cash flow of phase 2 is $5000000 per year, what is the present value of the net cash flow when evaluated at the beginning of phase 2 (year 4)?Note that phase 2 is 7 years.
5. If the evaluated net cash flow at the beginning of phase 2 (Year 4) is $16689600, what is the present value of the net cash flow evaluated at the beginning of the project (first year)?
6. With the present values of phase 1 material and labor costs of $610000 and $5580000, respectively, and phase 2 net cash flow of $9730670, will the company make a minimum 25% return on this investment?
Hint: Enter the difference between the present values of phase 2 net cash flow and the sum of material and labor cost of phase 1. If the difference is positive, then the company makes the minimum 25% return.
7. What is the present worth of all disbursements and receipts during the life time of the project, evaluated at the beginning of the first year, if the project has the following costs:
Phase 1 labor $2850000 (per year paid at the end of each year)
Phase 1 Material $780000 (paid at the end of the first year only
Phase 2 -years 4 to 10, all costs are paid at the end of each year and include:
Launch $6900000
Insurance $660000
Labor $1850000
Material $620000
The project makes an annual income of $13000000 as a result of sales in phase 2.
Hint: The present value of the net cash flow of phase 2, evaluated at the beginning of first year, must be greater than the sum of the present worth of labor and material costs of phase 1, also evaluated at the beginning of first year. The difference would be the answer to this problem. Make sure to include the sign (-) if the answer is negative.
Remember, if the present worth of all disbursements and receipts is positive, the company will make at least 25% annual return on this investment.