Question

In: Finance

Edward Corp. Will pay $50,000 for the new copier which is expected to last 7 years....

Edward Corp. Will pay $50,000 for the new copier which is expected to last 7 years. Annual maintenance costs will total of $1000 a year. Labor Cost Savings for back-office staff and a front desk receptionist will be $6,000 and $5,000 a year, respectively. The copier will have a residual value of $5,000 at the end of 7 years. The accountant at Edward Corp has established the Cost of Capital (Required Rate of Return for investors for the firm is 10%.

Calculate the NPV of the project and briefly discuss whether to accept or reject the project. Show your work.

Solutions

Expert Solution

Answer. Particulars 0 1 2 3 4 5 6 7
Cost of new copier       -50,000.00
Annual maintenance cost                        -   -1000 -1000 -1000 -1000 -1000 -1000 -1000
Labor cost savings - backoffice                        -   6000 6000 6000 6000 6000 6000 6000
Labor cost savings - frontoffice                        -   5000 5000 5000 5000 5000 5000 5000
Residual value of copier                        -                      -                      -                      -                      -                      -                      -   5000
Net cash flow             -50,000           10,000           10,000           10,000           10,000           10,000           10,000           15,000
PVF @ 10% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132
PV of CF -50,000.0000 9,090.9091 8,264.4628 7,513.1480 6,830.1346 6,209.2132 5,644.7393 7,697.3718
NPV = Sum of PV of all CF's      1,249.9788
Since the NPV is positive, the project should be ACCEPTED.
Answer. Particulars 0 1 2 3 4 5 6 7
Cost of new copier -50000
Annual maintenance cost 0 -1000 -1000 -1000 -1000 -1000 -1000 -1000
Labor cost savings - backoffice 0 6000 6000 6000 6000 6000 6000 6000
Labor cost savings - frontoffice 0 5000 5000 5000 5000 5000 5000 5000
Residual value of copier 0 0 0 0 0 0 0 5000
Net cash flow =SUM(C12:C16) =SUM(D12:D16) =SUM(E12:E16) =SUM(F12:F16) =SUM(G12:G16) =SUM(H12:H16) =SUM(I12:I16) =SUM(J12:J16)
PVF @ 10% =1/(1+0.1)^C10 =1/(1+0.1)^D10 =1/(1+0.1)^E10 =1/(1+0.1)^F10 =1/(1+0.1)^G10 =1/(1+0.1)^H10 =1/(1+0.1)^I10 =1/(1+0.1)^J10
PV of CF =C17*C18 =D17*D18 =E17*E18 =F17*F18 =G17*G18 =H17*H18 =I17*I18 =J17*J18
NPV = Sum of PV of all CF's =SUM(C19:J19)
Since the NPV is positive, the project should be ACCEPTED.


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