Question

Lnupier 13 Exercise 13-2. Lynde Company has been offered a contract to provide a key replacement part for the Army's main attack helicopter. The contract would expire in eight years. The projected cash flows that result from the contract are given below: Cost of new equipment.............................. $300,000 Working capital needed............ $100,000 Annual net cash inflows...... $ 85,000 Salvage value of equipment in eight years. $ 50,000 The company's discount rate is 16%. The working capital would be released for use elsewhere at the end of the project. Complete the analysis below to determine whether the contract should be accepted. (Ignore income taxes.)

PLEASE SHOW YOUR WORK

Answer 1

Net Present Value is the difference between the present value of future net cash inflow and initial cash outflow/investment. If it is negative then project should rejected and positive then project should be accepted. 6 85,000 $ 85,000 $ 85,000 $ 85,000 $ 85,000 $ 85,000 $ $ Particulars Annual Net Cash Flows Salvage Value Release of Working Capital Total Cash Flows (A) Present Value Factor r=16% (B) Present Value of Cash flows (A) x (B) Total Present Value of Future Cash Flows 7 L 8 85,000 $ 85,000 $ 50,000 $ 100,000 85,000 $ 235,000 0.35383 0.30503 30,076 $ 71,682 $ $ $ $ 85,000 0.86207 $ 73,276 $ 414,960 85,000 $ 0.74316 63,169 $ 85,000 0.64066 54,456 85,000 0.55229 46,945 85,000 $ 0.47611 40,469 $ 85,000 $ 0.41044 34,887 $ $ $ $ $ 414,960 Present value of future cash flow Less: Cost of New Equipment Less: Working Capital investment Total Investment Net Present Value $ 300,000 $ 100,000 $ (400,000) $ 14,960 Since the present value is positive the contract should be accepted.