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.)

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 13B-1 and Exhibit 13B-2. (Use appropriate factor(s) from the tables provided.) А 1 Chapter 13: Applying Excel $ $ 3 Data 4. Example E 5 Cost of equipment needed 6 Working capital needed 2 Overhaul of equipment in four years 8 Salvage value of the equipment in five years 9 Annual revenues and costs: 10 Sales revenues 11 Cost of goods sold 12 Out-of-pocket operating costs 13 Discount rate 160,000 20,000 5,000 25,000 $ $ $ $ 365,000 240,000 85,000 13 %

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 13%. 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

Depreciation on equipment = (Original cost - Salvage value)/Useful life 27000 Particulars Sales revenue COGS Out of pocket exp. Overhauling exp. Annual cash inflow 3,65,000 -2,40,000 -85,000 3,65,000 -2,40,000 3,65,000 -2,40,000 -85,000 3,65,000 -2,40,000 -85,000 -5,000 35,000 3,65,000 -2,40,000 -85,000 -85,000 Less: 40,000 40,000 40,000 40,000 Particulars Years -1,60,000 -20,000 -1,80,000 Cash outflow Cost of equipment Working capital requirement TOTAL CASH OUTFLOW Cash inflow Annual cash inflow Salvage value of equipment Recovery of initial working capital TOTAL CASH INFLOW 40,000 40,000 40,000 35,000 40,000 25,000 20,000 85,000 40,000 40,000 40,000 35,000

Present value factor Present value of cash inflows 0.885 35,398 0.783 31,326 0.693 27,722 0.613 21,466 0.543 46,135 Total present value of cash inflows Less: Cash outflows Net present value 1,62,047 -1,80,000 -17,953 As the net present value of the project is negative, the given project should not be accepted. IRR is the rate at which the NPV of a project becomes zero. In the given case, IRR should be 9.25% In order to have a positive net present value, the salvage value of the equipment should be more than $ 42,953 (25,000 + 17,953) Working notes In this question, since the tax rate has not been given, that's why the impact of depreciation by way of addition to the net profit after tax has not been considered.