Question

NET PRESENT VALUE
PROJECT A					PROJECT B
	Net Cash Flow	Present Value divisor or factor @ 8%	Present Value of Cash Flows (using math)			Net Cash Flow	Present Value divisor or factor @ 8%	Present Value of Cash Flows (using math)
Investment	(350,000)	1.0000	(350,000)		Investment	(350,000)	1.0000	(350,000)
Year 1					Year 1
Year 2					Year 2
Year 3					Year 3
Year 4					Year 3 Salvage
Year 4 Salvage
		NET PRESENT VALUE					NET PRESENT VALUE
		NPV using Excel:				NPV using Excel:

Leeds Company has an opportunity to invest in one or two new projects. Project A requires a $350,000 investment for new machinery with a

four-year life and no salvage value. Project B requires a $350,000 investment for new machinery with a three-year life and a $10,000 salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation and cash flows occur evenly throughout each year.

Project A

Sales	$350,000
Expenses:
Direct materials	49,000
Direct labor	70,000
Overhead including depreciation	126,000
Selling & administrative expenses	25,000
Tax rate	30%

Project B

Sales	$280,000
Expenses:
Direct materials	35,000
Direct labor	42,000
Overhead including depreciation	126,000
Selling & administrative expenses	25,000
Tax rate	30%

REQUIREMENTS:

1. In the first table in the working papers, you will use one column to determine net income, and the next column to determine net cash flows. HINT: Think about what on the income statement is never cash...this is the amount not to include in the net cash flows column. Compute each project’s annual expected net cash flows (round to nearest dollar)

2. Determine each project’s net present value using 8% as the discount rate (this is your interest rate). Assume that cash flows occur at each year-end (round to nearest dollar). Complete with both manual math formulas and using the Excel NPV formula.

 

 

Answer 1

		Computation of annual depreciation
						Project A		project B
		Cost of machine				350,000		350,000
		Salvage value						-10000
		Depreciable value				350,000		340,000
		number of useful life				4		3
		Annual depreciation				87500		113333.3333
		Computation of annual operating cash flow
						Project A		project B
		Sales				350000		280000
		Less total expenses				270000		228000
		Profit before tax				80000		52000
		Tax @ 30%				24000		15600
		Porifit after tax				56000		36400
		Depreciation				87500		113,333.33
		Cash flow				143500		149,733.33
			PROJECT A					PROJECT B
				Net Cash Flow	Present Value divisor or factor @ 8%	Present Value of			Net	Present Value divisor or factor @ 8%	Present Value of
						Cash Flows (using math)			Cash Flow		Cash Flows (using math)
			Investment	-350,000	1	(350,000.00)		Investment	(350,000.00)	1	-350,000.00
			Year 1	143500	0.9259	132,870.37		Year 1	149,733.33	0.9259	138,641.98
			Year 2	143500	0.8573	123,028.12		Year 2	149,733.33	0.8573	128,372.20
			Year 3	143500	0.7938	113,914.93		Year 3 with salvage value	159,733.33	0.7938	126,801.47
			Year 4	143500	0.7350	105,476.78					0.00
			Year 4 Salvage	0	0.7350	-
			NET PRESENT VALUE			125,290.20					43,815.64
			NPV using Excel:	$125,290.20	=NPV(8%,E29:E33)+E28				$43,815.64	=NPV(8%,J29:J33)+J28