Kelly has asked her accountant, Darla, to determine whether her company, Gaggin
ID: 2741395 • Letter: K
Question
Kelly has asked her accountant, Darla, to determine whether her company, Gaggin Industries, a leader in chain manufacturing, should purchase a new machine for $155,000 that can be sold at the end of 5 years for $125,000 and during that time will generate cash flows as follows: Year 1) + 4,000; Year 2) +7,000 and Years 3 - 5) + $15,000. She told Darla to determine her NPV with her cost of capital at 11.5%. With her NPV calculated, what will Darla tell her?
*Can you please show me how to enter into excel formula. thanks!
Explanation / Answer
Calculate the present value of the cashflows
Enter the values in excel as below:
Cost of capital
0.115
Year
Cashflow (x)
Discount rate = 1/(1+0.115)^n
Present Value
0
-155000
1
-155000
1
4000
0.89686099
3587.443946
2
7000
0.80435963
5630.517404
3
15000
0.72139877
10820.98156
4
15000
0.64699441
9704.916196
5
15000
0.58026405
8703.960714
5
125000
0.58026405
72533.00595
Present value
-44019.1742
Since the present value is negative, Darla would suggest not to purchase the new machine.
Cost of capital
0.115
Year
Cashflow (x)
Discount rate = 1/(1+0.115)^n
Present Value
0
-155000
1
-155000
1
4000
0.89686099
3587.443946
2
7000
0.80435963
5630.517404
3
15000
0.72139877
10820.98156
4
15000
0.64699441
9704.916196
5
15000
0.58026405
8703.960714
5
125000
0.58026405
72533.00595
Present value
-44019.1742
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