Refer to Exhibit 13-7. Is the return on this investment proposal exactly 14%, mo

Question

Refer to Exhibit 13-7. Is the return on this investment proposal exactly 14%, more than 14%, or less than 14%? Explain.

Chapter 13 Applying Excol 2 Data Example E Cost of equpment needed Working capital needed overhaul of equipment in four years S60,000 100,000 $5,000 8 Salvage value of the equipment in five year $10,000 Annual revenues and costs 0 Sales revenues 12 Cost of goods sold 12 Ou-of-pocket operating costs 13 Discount rate 14 5 Enter a fonmuta into each of the celrs marked with a ? belo 6 Exhibit 13- S200,000 $125,000 S35,000 14% 19 Purchase of equipment 0 Investment in working capital 22 Sales 22 Cost of goods sold 23 Out-of-pocket operating costs 4 Overhaul of equipment 25 Salvage value of the equipment Working capital released 27 Total cash flows (a) 28 Discount factor (14%) (b) 29 Present value of cash flows (a> ) Net present value 32 32 "Use the formuas from Appendix 13B 33 Present value of $1-110n 34, present value of an annuity of $1 (1 r)'(14141 +rm) 5 here n is the number of years and r is the discount rate 36

Explanation / Answer

it is more than 14%

Cost of Equipment Needed              60,000 Working Capital Needed          1,00,000 Overhaul of equipment in 4 years                5,000 Salvage Value of the equipment in 5th year              10,000 Annual Revenue and Costs Sales Revenue          2,00,000 Cost of Goods Sold          1,25,000 Out of pocket operating costs              35,000 Discount Rate 14% Year Now 1 2 3 4 5 Purchase of Equipment              60,000 Investment in Working Capital          1,00,000 Sales       2,00,000         2,00,000         2,00,000         2,00,000         2,00,000 Cost of goods sold       1,25,000         1,25,000         1,25,000         1,25,000         1,25,000 out of pocket operating cost           35,000             35,000             35,000             35,000             35,000 overhaul equipment               5,000 salvage value of the equipment             10,000 working capital released         1,00,000 total cash flows (a)    1,60,000.00     40,000.00       40,000.00       40,000.00       35,000.00 1,50,000.00 discount factor 14% (b) 1.000 0.877 0.769 0.675 0.592 0.519 present value of cash flows (4)*(b)          1,60,000           35,088             30,779             26,999             20,723             77,905 net present value              31,493

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