Question

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.)

Chapter 12: Applying Excel: Exercise (Part 2 of 2) 2. The company is considering a project involving the purchase of new equipment. Change the data area of your worksheet to match the following: Use Exhibit 12B-1 and Exhibit 12B-2. (Use appropriate factor(s) from the tables provided.) Bc 1 Chapter 12: Applying Excel $ $ 3 Data 4 Example E Cost of equipment needed Working capital needed Overhaul of equipment in four years 8 Salvage value of the equipment in five years Annual revenues and costs: Sales revenues Cost of goods sold Out-of-pocket operating costs 13 Discount rate 430,000 60,000 30,000 35,000 $ 10 11 12 $ $ $ 435,000 250,000 60,000 14 %

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 14%. 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

Particulars Year Cash Outflow Cost of Euipment Working Capital -430000 -60000 Cash Inflow Sales COGS Out of Pocket operating costs Overhaul of euipment Salvage Value 435000 -250000 -60000 435000 -250000 -60000 435000 -250000 -60000 435000 -250000 -60000 -30000 435000 -250000 -60000 35000 Net Cash Inflow (a) - 490000 125000 125000 125000 95000 160000 Discount Rate 14% Present Value Factor (b) 0.877 0.769 0.675 0.592 0.519 To calculate present value factor use 0.455 formula 1/(1+r)^n, where r=Discounting Rate=0.14 and n=no. of years Present Values of cash flows (a*b) -429730 96125 84375 74000 49305 72800 Net Present Value ( sum of (a*b)) -53125

As net preent value is negative, for IRR calculations we will take lower discounting rate than the 14% Net Cash Inflow (a) -490000 125000 125000 125000 95000 160000 Discount Rate 10% 0.909 0.826 0.751 0.683 0.621 To calculate present value factor use 0.565 formula 1/(1+r)^n, where r=Discounting Rate=0.14 and n= no. of years Present Value Factor (b) Present Values of cash flows (a*b) -445410 10325093875 85375 58995 90400 Net Present Value ( sum of (a*b)) - 13515

IRR Lower Rate +(NPV at Lower Rate * Difference between higher and lower rate / (NPV of lower rate - NPV of Higher rate) IRR 10+(-13515*4)/(-13515-(-53125)) IRR (approximate) 8.64 IRR is between 8% and 9%

As at 14% discount rate, net present value is -53125, so present value of salvage value should be more the 53125. That's why we need to find future value of 53125 Year Rate Compounding 0 53125 1 60562.5 2 69041.3 3 78707 4 89726 5 102288 14% 14% 14% 14% 14% 14% 7437.5 8478.75 9665.775 11018.9835 12561.64119 14320.27096 Future value after respective year 60562.5 69041.25 78707.025 89726.0085 102287.6497 116607.9206 Therefore if salvage value of euipment is more than 116607.92+35000= 151608 after five years, will result in positive net present value. Therefore salavage value should be 151760 to get Positive Net present value

Verification Particulars Year Cash Outflow Cost of Euipment Working Capital -430000 -60000 Cash Inflow Sales COGS Out of Pocket operating costs Overhaul of euipment 435000 -250000 -60000 435000 -250000 -60000 435000 -250000 -60000 435000 -250000 -60000 -30000 435000 -250000 -60000 Salvage Value 151760 We have taken salvage value grater than 151608 beacause of rouding. If we take salvage amount amount below 151760 it will result in negative net present value because of rounding effect. Net Cash Inflow (a) -490000 125000 125000 125000 95000 276760 Discount Rate 14% Present Value Factor (b) 0.877 0.769 0.675 0.592 0.519 To calculate present value factor use formula 1/(1+r)^n, where 0.455 r=Discounting Rate=0.14 and n= no. of years Present Values of cash flows (a*b) -429730 96125 84375 74000 49305 125926 Net Present Value ( sum of (a*b))