Question

San Lucas Corporation is considering investment in robotic machinery based upon the following estimates:

Cost of robotic machinery	$4,000,000
Residual value	300,000
Useful life	10 years

a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $700,000. Use the present value tables appearing in Exhibit 2 and 5 of this chapter.

Net present value $

b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $500,000, $700,000, and $900,000. Use the present value tables (Exhibit 2 and 5) provided in the chapter in determining your answer. If required, use the minus sign to indicate a negative net present value.

Annual Net Cash Flow	$500,000	$700,000	$900,000
Net present value	$	$	$

c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar.

Annual Net Cash Flow $

Answer 1

a.

Cost of Robotic Machine = $ 4,000,000

Residual Value at end of 10 Years= $ 300,000

Annual Net cash flows = $700,000

PVIFA @ 10% for 1-10 years = 6.1445

PVIF @ 10% for 10th years = 0.38554

PV of annual Net cash flow = 6.1445* $700,000 = $ 4,301,197

Add: PV of residual value = 0.38554* $300,000 = $ 115,663

PV of cash flow = $ 4,416,860

NPV of equipment = PV of cash flow - cost of robotic machinery

NPV of equipment = $ 4,416,860 - $ 4,000,000

NPV of equipment = $416,860

b.

Particular
Annual Net cash flow	$            500,000.00	$            700,000.00	$    900,000.00
PV of annual Net cash flow @ 6.1445	$          3,072,250.00	$         4,301,150.00	$ 5,530,050.00
Add: PV of residual value (300000*0.38554)	$            115,662.00	$            115,662.00	$    115,662.00
PV of cash flow	$          3,187,912.00	$         4,416,812.00	$ 5,645,712.00
Less: Cost of Machinery	$         (4,000,000.00)	$        (4,000,000.00)	$(4,000,000.00)
NPV	$           (812,088.00)	$            416,812.00	$ 1,645,712.00

c.  

PVIFA for 1-10 years @ 10% = 6.1445

PVIF @ 10% for 10th years = 0.38554

Cost of machinery = npv of cash flow

$ 4000000 = 6.1445* Annual Net Cash Flow + 300000*0.38554

6.1445* Annual Net Cash Flow = $ 4000000 - $115662

Annual Net Cash Flow= $ 3884338/6.1445

Annual Net Cash Flow  = $ 632,165