Question

Description Kids Moving (KM), a small not-for-profit sports center is considering purchasing a new set of pitching machines they currently rent. There will be annual maintenance on the machines that KM will now have to pay. And at the end of 5 years, the machine will be worthless and you will have to pay to have it taken away. The following data has been obtained: Cost of equipment needed $444,444 Working capital needed (released at end of project) Annual savings on rent not 18 paid Annual maintenance $66,666 expense Disposal cost at the end of tags the project cost of capital 7% * You will have to pay $8,888 to have the machine taken away. Complete the following questions and submit as a Microsoft EXCEL document 1. Compute the NPV and the IRR of the investment 2. Should the KM invest in the project? 3. What would your answer be if the purchase will require additional staff training all during year 1 of $11,000? (Net Present Value? IRR? Decision?)

Answer 1

Answer is given below

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Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 7% -$444,444 -$20,000 $180,000 $180,000 $180,000 $180,000 $180,000 Interest Rate Initial Investment Working capital Annual savings on rent Less: Annual maintenance expense Operating cash inflow Less: Disposal cost Add: Working capital released Total Cash inflows /(Outflows) Present value at 7% Present value of Cash flows $66,666 $113,334 $66,666 $113,334 $66,666 $113,334 $66,666 $113,334 $66,666 $113,334 $8,888 $20,000 $124,446 0.7130 $88,728 $113,334 $464,444 1.0000 -$464,444 $113,334 0.8734 $98,990 $113,334 0.8163) $92,514 $113,334 0.7629 $86,462 NPV $8,170 $105,920 Net present value $8,170 Internal Rate of Return Year Om Cash Inflow/ (Outflow) -464,444 113,334 113,334 113,334 113,334 124,446 7.6% IRR Yes investment should be made since NPV is positive and IRR is above cost of capital Staff Training cost of $11,000 in year 1 Year 1 Year 2 Year 3 Year 4 Year 5 7% $180,000 $66,666 $180,000 $66,666 $180,000 $66,666 $180,000 $66,666 Year 0 Interest Rate Initial Investment -$444,444 Working capital -$20,000 Annual savings on rent Annual maintenance expense Staff training cost Operating cash inflow Less: Disposal cost Add: Working capital released Total Cash inflows /(Outflows) |-$464,444 Present value at 7% 1.0000 Present value of Cash flows -$464,444 $180,000 $66,666 $11,000 $102,334 $113,334 $113,334 $113,334 $113,334| $8,888 $20,000 $124,446| 0.7130 $88,728 $102,334 0.9346 $95,639 $113,334 0.8734 $98,990 $113,334| $113,334 0.8163 0.7629 $86,462 NPV $2,110 Net present value $2,110 Internal Rate of Return Year Cash Inflow/ (Outflow) -464,444 102,334 113,334 113,334 113,334 124,446 6.8% NPV is negative and IRR is below cost of capital Hence investment should not be made

A В F G H I Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 0.07 -444444 -20000 180000 180000 180000 180000 180000 Interest Rate Initial Investment Working capital Annual savings on rent Less: Annual maintenance expense Operating cash inflow Less: Disposal cost Add: Working capital released Total Cash inflows /(Outflows) Present value at 7% Present value of Cash flows 66666 =D7-09 66666 =E7-E9 66666 =F7-F9 66666 =G7-G9 66666 =H7-H9 8888 --C6 =H10-H11+H12 =1/014 =H13*H14 SUM(C5:C12) =D10-D12 D11 =1/K14 =D136014 =E10-E12-E11 -1/L14 =E13*E14 =F10-F12+F11 - 1/M14 =F13-F14 =G10-G12+G11 1/N14 =G13.G14 =C13*014 NPV -SUM(C15:H15) Net present value I-SUM(C15:H15) Internal Rate of Return Year Cash Inflow/ (Outflow) =D13 =B22+1 =B23+1 =B24+1 =B25+1 IRR =E13 =F13 =G13 =H13 =IRR(C21:C26) N NGO Truck Car Dec 23 Table R MSM Best worst Incremental IRR Derrick Payback DDB Equipmenti |