2 The company is considering a project involving the purchase of new equipment.

Question

2 The company is considering a project involving the purchase of new equipment. Change the data area of your worksheet to match the following 1 Chapter 13: Applying Excel 3 Data 4 Example C 5 Cost of equipment needed 6 Working capital needed 7 Overhaul of equipment in four years 8 Salvage value of the equipment in 9 Annual revenues and costs 10 Sales revenues 11 Cost of goods sold 12 Out-of-pocket operating costs 13 Discount rate 14 $260,000 $40,000 $20,000 $35,000 $385,000 $235,000 $75,000 13% a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Round all other intermediate calculations to nearest whole dollar.) pres value

Explanation / Answer

a. Computation of NPV = -7,767

Year

Cash flows

Discounting at 13%

PV of cash flows

0

260,000+40,000 = (300,000)

                   1

                    (300,000)

1

385,000-235,000-75,000 = 75,000

         0.8850

                   66,371.68

2

                  75,000

         0.7831

                   58,736.00

3

                  75,000

         0.6931

                   51,978.76

4

               75,000-20,000=    55,000

         0.6133

                   33,732.53

5

                75,000+40,000+35,000 = 150,000

         0.5428

                   81,413.99

NPV

                   (7,767.03)

b. The internal rate of return between: 12% and 13%

c. Minimum salvage value required to generate a positive present value = 35,000+ 14,738 = 49,738

Year

Cash flows

Discounting at 13%

PV of cash flows

0

             (300,000)

                   1

                    (300,000)

1

                  75,000

         0.8850

                   66,371.68

2

                  75,000

         0.7831

                   58,736.00

3

                  75,000

         0.6931

                   51,978.76

4

                  55,000

         0.6133

                   33,732.53

5

                164,738

         0.5428

                   89,413.19 (here, i added 8,000 to get positive present value)

NPV

                         232.16

In year 5 additional salvage value = 8,000/ 0.5428 = 14,738

Year

Cash flows

Discounting at 13%

PV of cash flows

0

260,000+40,000 = (300,000)

                   1

                    (300,000)

1

385,000-235,000-75,000 = 75,000

         0.8850

                   66,371.68

2

                  75,000

         0.7831

                   58,736.00

3

                  75,000

         0.6931

                   51,978.76

4

               75,000-20,000=    55,000

         0.6133

                   33,732.53

5

                75,000+40,000+35,000 = 150,000

         0.5428

                   81,413.99

NPV

                   (7,767.03)

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