Question

part 1

Data Example E Cost of equipment needed Working capital needed Overhaul of equipment in four years Salvage value of the equipment in five years Annual revenues and costs: Sales Cost of goods sold Out-of-pocket operating costs Discount rate $60,000 $100.000 $5,000 $10,000 $200,000 $125,000 $35,000 14% Enter a forma into each of the cells marked with a ? Below Exhibit 13-8 Years 13 14 Now (60,000) (100,000) Purchase of equipment Investment in working capital Sales Cost of goods sold Out-of-pocket operating costs Overhaul of equipment Salvage value of the equipment Working capital released Total cash flows (a) Discount factor (14%) (b) Present value of cash flows (a) Net Present Value 200.000 200.000 200.000 200.000 200.000 (125,000) (125,000) (125,000) (125,000) (125,000) (35.000 (33.000) (35.000) (35.000) (33.000) (5,000) $10,000 $100,000 $40,000 $40,000 $40,000 $35,000 $150,000 0.877192982 0.769467528 0.674971516 0.592080277 0.519368664 $35,088 $30,779 $26,999 $20,723 $77,905 (160,000) 1.00000000 (160,000 $31,493 (b) *Use the formulas from Appendix 13B Present Value of $1 = 1/(1+1) 'n Present Value of an annuity of $1 = (1/1)*(1-(1/(1+1) 'n) where n is the number of years and r is the discount rate

part 2

Answer 1

B12 D E F G H I J 340,000 20,000 40,000 25,000 cost of equipment working capital needed overhaul in 4 years salvage in 5 years annual costs and revenue sales cost of goods sold out of pocket costs discount rate 415,000 245,000 75,000 13% $ purchase of equipment investment in working capital sales cost of goods sold out of pocket costs overhaul salvage value working capital released total cash flows (a) discount factor (13%) (b) present value of cash flows (a) (b) net present value years now 2 3 4 -340,000 -20,000 $ 415,000 $ 415,000 $ 415,000 $ 415,000 $ 415,000 $-245,000 $-245,000 $-245,000 $-245,000 $-245,000 $ -75,000 $ -75,000 $ -75,000 $ -75,000 $ -75,000 $ -40,000 $ 25,000 $ 20,000 -360,000 $ 95,000$ 95,000$ 95,000 $ 55,000 $ 140,000 1.000 0.885 0.783 0.693 0.613 0.543 -360,000 $ 84,075 $ 74,385 $ 65,835 $ 33,715 $ 76,020 -25,970 $ $

2 A B G H I J IRR = L 10.08% hence, the internal rate of return is between 10% and 11% at 13% net present value without salvage value shall be as follows | now 1 total cash flows (a) $ -360,000 $ 95,000$ discount factor (13%) (b) 1.000 0.885 present value | $ -360,000 $ 84,075 $ net present value without salvage value $ -39,545 so the present value of salvage value shall be minimum $ minimum salvage value required to generate a positive present value $ 2 95,000$ 0.783 74,385 $ 3 95,000 $ 0.693 65,835 $ 4 5 55,000 $ 115,000 0.613 0.543 33,715 $ 62,445 39,545 72,827

for formulas and calculations, refer to the image below -

B12 AB D 340000 20000 40000 25000 cost of equipment working capital needed overhaul in 4 years salvage in 5 years annual costs and revenue sales cost of goods sold out of pocket costs discount rate 415000 245000 75000 0.13 years now --02 --D3 =$D$7 =$D$7 --$D$8 = $D$9 =$D$7 =-$D$8 --$D$9 =$D$7 - $D$8 = $D$9 --SDS =$D$7 --$D$8 --$D$9 --$D$9 --D4 purchase of equipment investment in working capital sales cost of goods sold out of pocket costs overhaul salvage value working capital released total cash flows (a) discount factor (13%) (b) present value of cash flows (a) * (b) net present value =SUM(D14:D21) =SUM(E14:E21) =ROUND(-PV(13%,E13,0,1),3) =E22*E23 =SUM(F14:F21) =ROUND(-PV(13%,F13,0,1),3) =F22*F23 =SUM(G14:G21) =ROUND(-PV(13%,613,0,1),3) =G22*G23 =SUM(H14:H21) =ROUND(-PV(13%,H13,0,1),3) =H22*H23 =D5 =D3 =SUM(114:121) =ROUND(-PV(13%,113,0,1),3) =122*123 =D22 *D23 =SUM(D24:124)

In case you have any query, kindly ask in comments.

B27 A B IRR = =IRR(D22:122,10%) hence, the internal rate of return is between I and 10.11 =F22 =122-120 at 13% net present value without salvage value shall be as follows now total cash flows (a) =D22 =E22 discount factor (13%) (b) =D23 =E23 present value =D33D34 =E33*E34 net present value without salvage value =SUM(D35:135) so the present value of salvage value shall be mi minimum salvage value required to generate a positive present value 3 =G22 =G23 =G33*G34 =H22 =H23 =H33*H34 =F33*F34 =133*134 --036 =F37/134