In: Finance
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.
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. |