Question

Sensitivity analysis: San Lucas Corporation

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) NPV when annual cash flows are 700,000 $= 416,859.96

(b)

Annual net cash flow	$ 500,000	$ 700,000	$900,000
Net Present Value	-812,053.46 $	416,859.96	$1,645,773.38

(c) minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%= 632,300 $ each year