Question

2) The New World Soccer League is evaluating the purchase of a used van to transport equipment to games. The cost of the van is $10,000 and it is expected to have a useful life of three years. Insurance, maintenance and gas will cost $1,500 annually. At the end of three years it is expected the van could be sold for $2,500. By buying the van New World will save $3,700 annually on rental costs. Using a 11% discount rate/hurdle rate calculate the IRR and NPV. Ignore taxes and inflation. What decision should be made. Why?

PLEASE USE EXCEL FORMULA TO SOLVE THE PROBLEMS

Answer 1

А 1 2) The New World Soccer League: Step 1: Initial investment cash outflow: Van -$10,000 Step 2: Operating cash flow at per year: Annual cost saving = Less:- Insurance, Maintenance & gas Net Cash Operating cash flow per year $3,700 -$1,500 $2,200 Step 3: Terminal Cash flow at end of three year Van sold $2,500 Discount Rate = 11% We can make timeline of cash flow, that will be easy to understand: CF at time = 0 CF at time = 1 CF at time = 2 CF at time = 3 $2,200 $2,200 $4,700 -$10,000 NPV =NPV(D16,C21:E21)+B21 IRR IRR(B21:E21) Decision = -$2,795.85 -4.04% REJECT Because NPV is negative

ABC Yarn Company: Step 1: Initial investment cash outflow: Equipment -$40,000 Step 2: Operating cash flow at per year: Generate revenue Less:- Supply expenses Less:- Maintenance cost Net Cash Operating cash flow per year $16,000 -$2,000 -$600 $13,400 Discount Rate = 8% We can make timeline of cash flow, that will be easy to understand: CF at time = 0 CF at time = 1 CF at time = 2 CF at time = 3 CF at time = 4 -$40,000 $13,400 $13,400 $13,400 $13,400 NPV =NPV(D16,C21:E21)+B21 IRR =IRR(B21:E21) Decision = $4,382.50 12.83% ACCEPT Because NPV is Positive