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Danforth Donnalley Laundry Products Company Integrative Problem - Assignment Example

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Cash flows can either occur in the operating, financing and investing activities. The use of debt to finance Danforth and Donnalley Laundry Products Company falls under financing activities. Debts taken by…
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Danforth Donnalley Laundry Products Company Integrative Problem
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Danforth Donnalley Laundry Products Company Integrative Problem Cash flows reflect the flows of cash from and into a business entity. Cash flows can either occur in the operating, financing and investing activities. The use of debt to finance Danforth and Donnalley Laundry Products Company falls under financing activities. Debts taken by companies to finance its activities are often paid back with an interest. In this case, if the company’s project was financed through a debt, the company would make interest payments.

These interest payments represent flows of cash from the company and should be considered cash flows (Brigham & Ehrhardt, 2011). NPV =  (R1 + R2 + R3 + .  ) /{( 1 + i )1( 1 + i )2( 1 + i )3 } − Initial Investment Initial investment = 2, 000, 000 + 500, 000 = 2, 500, 000Rate of Discount = 10%PV factor, year 1 = 1/ (1+ 10%) ^1 ≈ 0.909PV factor, year 2= 1/ (1+ 10%) ^2 ≈ 0.826PV factor, year 3 = 1/ (1+ 10%) ^3 ≈ 0.7513PV factor, year 4 = 1/ (1+ 10%) ^4 ≈ 0.683PV factor, year 5 = 1/ (1+ 10%) ^5 ≈ 0.

6209PV factor, year 6 = 1/ (1+ 10%) ^6 ≈ 0.5646PV factor, year 7 = 1/ (1+ 10%) ^7 ≈ 0.5131PV factor, year 8 = 1/ (1+ 10%) ^8 ≈ 0.4665PV factor, year 9 = 1/ (1+ 10%) ^9 ≈ 0.4241PV factor, year 10 = 1/ (1+ 10%) ^10 ≈ 0.3855PV factor, year 11 = 1/ (1+ 10%) ^11 ≈ 0.3505PV factor, year 12 = 1/ (1+ 10%) ^12 ≈ 0.3186PV factor, year 13= 1/ (1+ 10%) ^13 ≈ 0.2896PV factor, year 14 = 1/ (1+ 10%) ^14 ≈ 0.2633PV factor, year 15 = 1/ (1+ 10%) ^15 ≈ 0.2394Exhibit 1YearCash flowPresent Value FactorPresent value of Cash Flows1280, 0000.

909254, 5202280, 0000.826231, 2803280, 0000.7513210, 3644280, 0000.683191, 2405280, 0000.6209173, 8526350, 0000.5646197, 6107350, 0000.5131179, 5858350, 0000.4665163, 2759350, 0000.4241148, 43510350, 0000.3855134, 92511250, 0000.350587, 62512250, 0000.318679, 65013250, 0000.289672, 40014250, 0000.263365, 82515250, 0000.239459, 850Total present value = 2, 250, 436Net Present Value = 2, 250, 436 – 2, 500, 000 = - 249, 564Exhibit 2YearCash flowPresent Value FactorPresent value of cash flows1250, 0000.

9092272502250, 0000.8262065003250, 0000.75131878254250, 0000.6831707505250, 0000.62091552256315, 0000.56461778497315, 0000.5131161626.58315, 0000.4665146947.59315, 0000.4241133591.510315, 0000.3855121432.511225, 0000.3505110407.512225, 0000.318610035913225, 0000.28969122414225, 0000.263382939.515225, 0000.239475411Total Present Value of Cash Flows = 2, 149, 338Net Present Value = 2, 149, 338 – 2, 500, 000 = - 350, 662Internal Rate of ReturnIRR is the discounting percentage at which NPV is zero.

The IRR for exhibit one is 8.56%The IRR for exhibit two is 6.32%Profitability IndexProfitability Index = Present Value of Future Cash Flows/Initial Investment RequiredExhibit one = 2, 250, 436/ 2, 500, 000 = 0.9001744Exhibit two = 2, 149, 338/ 2, 500, 000 = 0.8597352I would not accept this project. It has a low profitability index and introduction of a similar product by a competitor would profoundly affect the profitability of the company (Brigham & Ehrhardt, 2011).

ReferencesBrigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning.

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