Question

The engineering staff at the Sun Shipping Company has informed decision-makers that substantial money can be saved on the fleet's fuel bills if the ships' engines are adapted. Based on the cost of fuel, the engineers estimate that the firm will save $60,000 each year for the first 5 years and save $85,000 per year for the following five years. If these estimates are accurate, what would the company be willing to pay to adapt the engines? The company can earn 9% annually on its investments. Please solve using excel.

Answer 1

Savings

From yr 1-5 = $60,000

From yr 6-10 = $85,000

Discount rate = 9%

We can calculate the Present Value of future savings in excel,

Yr	Cash Flow	Discounting factor (PV @ 9%)	PV of cashflow
1	60000	0.91743	55045.87
2	60000	0.84168	50500.80
3	60000	0.77218	46331.01
4	60000	0.70843	42505.51
5	60000	0.64993	38995.88
6	85000	0.59627	50682.72
7	85000	0.54703	46497.91
8	85000	0.50187	42658.63
9	85000	0.46043	39136.36
10	85000	0.42241	35904.92
		NPV	448,259.62

Net Present Value(NPV) is the difference between the present value of cash inflows and the present value of cash outflows. It is used in evaluating capital budgeting decisions.

Hence NPV is $448,259.62.

The company would be willing to pay no more than $448.259.62 to adapt the engines.

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