Question

NEED HELP!

Chapter 13: Applying Excel
Data
Example E
Cost of equipment needed	$280,000
Working capital needed	$60,000
Overhaul of equipment in four years	$30,000
Salvage value of the equipment in five years	$25,000
Annual revenues and costs:
Sales revenues	$395,000
Cost of goods sold	$235,000
Out-of-pocket operating costs	$75,000
Discount rate	15	%

a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Round your present value factor to 3 decimals and round all other intermediate calculations to nearest whole dollar.)

c. The internal rate of return is between what two whole discount rates (e.g., between 10% and 11%, between 11% and 12%, between 12% and 13%, between 13% and 14%, etc.)?

d. Reset the discount rate to 15%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value?

Answer 1

Solution Required (a). Step-1: Computation of annual operating cash inflows Sales revenue Less: Cost of Goods sold Less: Out-of-pocket operating costs Annual operating cash inflows $395,000 ($235,000) ($75,000) $85,000 Step-2: Calculate Net Present value Cash flows Period Present value Present Value Factor @ 15% ($280,000) ($60,000) 3.352 $284,920 Initial investment Working capital needed Annual operating cash inflows ($280,000)| ($60,000) $85,000 0 0 1-5 Overhaul of equipment in four years ($30,000) 0.572 ($17,160) $25,000 $12,425 Salvage value of the equipment in five years Release of Working capital Net Present Value of the project 0.497 0.497 $ 60,000 5 $29,820 ($29,995) Required (c). Computation of IRR We shall calculate the NPV of the project at various discount rate starting from 11%. Cash flows Period Present value Present Value Factor @ @ 11% 11% ($280,000) ($60,000) 3.696 $314,160 Present value Present Factor @Value @ 12% 12% 1 ($280,000) ($60,000) 3.605 $306,425 Initial investment Working capital needed Annual operating cash inflows C00010 ($280,000) ($ 60,000) $85,000 1-5 | Overhaul of equipment in four years ($30,000) 0.659 ($19,770) 0.636 ($19,080) $25,000 0.593 $14,825 0.567 $14,175 Salvage value of the equipment in five years Release of Working capital Net Present Value of the project | $60,000 5 0.593 $35,580 $4,795 0.567| $34,020 ($4,460) Since, at discount rate 11% NPV is positive but at discount rate 12%, NPV is negative. It indicates that the IRR of the project is between 11% and 12%. Required (d). NPV of the project @ discount rate 15% NPV of the project @ discount rate 15% (excluding salvage) (-$29,995 - $12,425) ($29,995) ($42,420) NPV of the Salvage value, required Present value factor for 5 years @ 15% Salvage value required for positive net present value ($42,420/0.497) ($42,420) 0.497 $85,352