Question

Question: Please I need answers for "REQUIREMENTS" 7 and 8.

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:

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.

7.   Create and apply different Excel scenarios with the Scenario Manager.

8.   Generate a scenario summary report.

Answer 1

	LEEDS COMPANY
	Investment in Project A	$      3,50,000.00
	Useful life	4	Years
	Depreciation=($350000/4)	$          87,500.00
		Year 1-4
	Sales	$      3,50,000.00
	Expenses
	Direct Material	$          49,000.00
	Direct Labor	$          70,000.00
	Overhead (Including Depreciation of $87500)	$      1,26,000.00
	Selling and Administerative Expenses	$          25,000.00
	Total Expenses	$      2,70,000.00
	Net Income before tax	$          80,000.00
	Tax @30%=($80000*30%)	$          24,000.00
	Net Income after tax=($80000-$24000)	$          56,000.00
	Add: Depreciation	$          87,500.00
	Annual free cash flow=($56000+$87500)	$      1,43,500.00
	B	C	D	E	F	G
21	Year	0	1	2	3	4
22	Investment	$    -3,50,000.00
23	Annual Free cash flow		$ 1,43,500.00	$ 1,43,500.00	$ 1,43,500.00	$ 1,43,500.00
24	P.V Factor 8% for 4 years	1	0.926	0.857	0.794	0.735
25	P.V	$    -3,50,000.00	$ 1,32,881.00	$ 1,22,979.50	$ 1,13,939.00	$ 1,05,472.50
26	NPV	SUM(C25:g25)
27	NPV	125272
	Investment in Project B	$      3,50,000.00
	Useful life	3	Years
	Salvage Value	10000
	Depreciation=($350000-$10000)/4)	$      1,13,333.33
		Year 1-3
	Sales	$      2,80,000.00
	Expenses
	Direct Material	$          35,000.00
	Direct Labor	$          42,000.00
	Overhead (Including Depreciation of $113333.33)	$      1,26,000.00
	Selling and Administerative Expenses	$          25,000.00
	Total Expenses	$      2,28,000.00
	Net Income before tax	$          52,000.00
	Tax @30%=($52000*30%)	$          15,600.00
	Net Income after tax=($52000-$15600)	$          36,400.00
	Add: Depreciation	$      1,13,333.33
	Annual free cash flow=($36400+$113333.33)	$      1,49,733.33
	B	C	D	E	F
48	Year	0	1	2	3
49	Investment	$    -3,50,000.00
50	Annual Free cash flow		$ 1,49,733.33	$ 1,49,733.33	$ 1,59,733.33
51	P.V Factor 8% for 4 years	1	0.926	0.857	0.794
52	P.V	$    -3,50,000.00	$ 1,38,653.07	$ 1,28,321.47	$ 1,26,828.27
53	NPV	SUM(C52:F52)
54	NPV	$          43,802.80
	Annual Free Cash Flow of Year 3 includes $10000 Salvage Value
	NPV of Project A is greater than Project B, so Project A is accepted.