Question

Nona Sports is considering the purchase of new production equipment. The equipment will cost $135,000. It has an expected useful of life of 5 years, but will require refurbishing at the end of 3 years. The refurbishment will cost $5,000. The estimated salvage value at the end of the useful life is $10,000. The increased annual net income from the equipment is projected to be $40,000. Using a hurdle rate of 12%, calculate the NPV for the equipment.

*If you get 101426.1, 11307 , or 11230 those are all incorrect*

Nona Sports can acquire a new machine for $43,500. The machine should generate new cash inflows of $15,000 per year for 4 years. No salvage value is projected. Calculate the IRR for the investment to 4 decimal places. Set your calculator to END.

*need to be percentage 14% is incorrect*

Nona Pizza Company is considering the purchase of a new pizza oven. The oven will cost $5,000. It will have zero residual value at the end of its useful life of 5 years. The energy efficient oven is projected to generate annual cost savings of $1,800 per year. Calculate the NPV of the pizza oven investment using a 10% hurdle rate.

*1823.42 is incorrect*

Answer 1

Solution

	Year	Outflow	Annual Income	Refurbishment	Salvage Value	Cash flows	PV @ 12%	Present Value (Cashflows * PV factor)
	0	($135,000)				($135,000)	1	($135,000)
	1		$40,000			$40,000	0.893	$35,720
	2		$40,000			$40,000	0.797	$31,880
	3		$40,000	($5,000)		$35,000	0.718	$25,130
	4		$40,000			$40,000	0.636	$25,440
	5		$40,000		$10,000	$50,000	0.567	$28,350
							NPV	$11,520
	Year	Cashflows
	0	($43,500)		Initial Investment = Annual Cash Inflow * PVIFA ( rate, 5)
	1	$15,000
	2	$15,000		$43500 = $15000 * PVIFA ( rate, 4)
	3	$15,000		PVIFA (rate, 4 ) = $2.9
	4	$15,000		IRR = 14%
	IRR	14%
	Excel Formula	IRR(C12:C16)
	Year	Cashflows	PVF @10%	Present Value
	0	($5,000)	1	($5,000)
	1	$1,800	0.909	$1,636
	2	$1,800	0.826	$1,487
	3	$1,800	0.751	$1,352
	4	$1,800	0.683	$1,229
	5	$1,800	0.621	$1,118
			NPV	$1,822

In calculation of Present Value factor, I have taken PVF at 3 decimal points, you can take 2 decimal or 4 decimal points also. This can lead to little change of answer

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