Question

35. Net Present Value Analysis. Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual net cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent.

Required:

a. Ignoring the time value of money, calculate the net cash inflow or outflow resulting from this investment opportunity.

b. Find the net present value of this investment using the format presented in.

Round to the nearest dollar.

c. Should the company purchase the wood lathe? Explain. Internal Rate of Return Analysis. Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual net cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent (this is the same data as the previous exercise).

·Anonymous

719 answers

Req a. Cash inflows and outflows
Year	Cash Flows
0	-100000	Initial investment
1	25000	Annual cash receipts less Annual maintenance cost
2	25000	Annual cash receipts less Annual maintenance cost
3	25000	Annual cash receipts less Annual maintenance cost
4	25000	Annual cash receipts less Annual maintenance cost
5	30000	Annual cash receipts less Annual maintenance cost + salvage value
Req b:
Year	cashflows	PVF @ 15%	Present value
0	-100000	1	-100000
1	25000	0.869565	21739.13
2	25000	0.756144	18903.59
3	25000	0.657516	16437.91
4	25000	0.571753	14293.83
5	30000	0.497177	14915.3
Net present value			-13710
Req C: No Company should not purchasse the machine, as the NPV of machine is (13710)
IRR:
NPV at 15% = ($13710)
NPV at 9%
Year	cashflows	PVF @ 9%	Present value
0	-100000	1	-100000
1	25000	0.917431	22935.78
2	25000	0.84168	21042
3	25000	0.772183	19304.59
4	25000	0.708425	17710.63
5	30000	0.649931	19497.94
Net present value			491
IRR = Lower rate + (NOV at lower rate/ Difference in NOV) * Difference in Rates
	9% + ( 491 / 14201)*6% = 9.21%

Required:

a. Use trial and error to approximate the internal rate of return for this investment proposal.

b. Should the company purchase the wood lathe? Explain. Payback Period Calculation. Wood Products Company would like to purchase a computerized wood lathe for $100,000. The machine is expected to have a life of 5 years, and a salvage value of $5,000. Annual maintenance costs will total $20,000. Annual net cash receipts resulting from this machine are predicted to be $45,000. The company’s required rate of return is 15 percent (this is the same data as the previous exercise). Determine the payback period for this investment using the format shown

in . Net Present Value Analysis and Qualitative Factors, Alternative

Format. Pete’s Plumbing Supplies would like to expand into a new warehouse at a cost of $500,000. The warehouse is expected to have a life of 20 years, and a salvage value of $100,000. Annual costs for maintenance, insurance, and other cash expenses will total $60,000. Annual net cash receipts resulting from this expansion are predicted to be $115,000. The company’s required rate of return is 12 percent.

Required:

a. Find the net present value of this investment using the format presented in.

Round to the nearest dollar.

b. Should the company purchase the new warehouse? Explain.

c. Provide one qualitative factor that might cause the company to reach a different conclusion than the one reached in requirement b. Calculating NPV and IRR Using Excel. Pete’s Plumbing Supplies would like to expand into a new warehouse at a cost of $500,000. The warehouse is expected to have a life of 20 years, and a salvage value of $100,000. Annual costs for maintenance, insurance, and other cash expenses will total $60,000. Annual net cash receipts resulting from this expansion are predicted to be $115,000. The company’s required rate of return is 12 percent.

Required:

a. Use Excel to calculate the net present value and internal rate of return in a format similar to the Computer Application spreadsheet shown in the chapter.

b. Should the company purchase the warehouse? Explain. Net Present Value Analysis with Taxes. Quality Chocolate, Inc., would like to purchase a new machine for $200,000. The machine will have a life of 4 years with no salvage value, and is expected to generate annual cash revenue of $90,000. Annual cash expenses, excluding depreciation, will total $10,000. The company uses the straight-line depreciation method, has a tax rate of 30 percent, and requires a 14 percent rate of return.

Answer 1

a. IRR = 9.1844%

Year	Particular	Cash Flow	PV @ 9.1844 %	Dis. PV
0	Initial Investment	-1,00,000.00	1.00000	-1,00,000.00
1	Net cash inflow	25,000.00	0.91588	22,897.04
2	Net cash inflow	25,000.00	0.83884	20,970.97
3	Net cash inflow	25,000.00	0.76828	19,206.92
4	Net cash inflow	25,000.00	0.70365	17,591.26
5	Net cash inflow	25,000.00	0.64446	16,111.51
5	Salvage Value	5,000.00	0.64446	3,222.30

2. Company should not purchase the machine and IRR 9.1844% is lower than company's require rate of return 15%. Company should purchase the machine only if the IRR is more than or equal to its require rate of return. If company decide to invest below the require rate of return then companies expected revenue goal will not be achived and it will face deficit/loss.

3. Payback Period Calculation

We are calculate simple payback period without cost of capital effect

Year	Particular	Cash Flow	Payback
0	Initial Investment	-1,00,000.00
1	Net cash inflow	25,000.00	-75,000.00
2	Net cash inflow	25,000.00	-50,000.00
3	Net cash inflow	25,000.00	-25,000.00
4	Net cash inflow	25,000.00	-
5	Net cash inflow	25,000.00	25,000.00
5	Salvage Value	5,000.00	30,000.00

Pay back period is end of 4th year

4. Net Present Value Analysis @ 12 %

Year	Particular	Cash Flow	PV @ 12%	Dis. PV
0	Initial Investment	-5,00,000.00	1.00000	-5,00,000.00
1	Net cash inflow	55,000.00	0.89286	49,107.14
2	Net cash inflow	55,000.00	0.79719	43,845.66
3	Net cash inflow	55,000.00	0.71178	39,147.91
4	Net cash inflow	55,000.00	0.63552	34,953.49
5	Net cash inflow	55,000.00	0.56743	31,208.48
6	Net cash inflow	55,000.00	0.50663	27,864.71
7	Net cash inflow	55,000.00	0.45235	24,879.21
8	Net cash inflow	55,000.00	0.40388	22,213.58
9	Net cash inflow	55,000.00	0.36061	19,833.55
10	Net cash inflow	55,000.00	0.32197	17,708.53
11	Net cash inflow	55,000.00	0.28748	15,811.19
12	Net cash inflow	55,000.00	0.25668	14,117.13
13	Net cash inflow	55,000.00	0.22917	12,604.58
14	Net cash inflow	55,000.00	0.20462	11,254.09
15	Net cash inflow	55,000.00	0.18270	10,048.29
16	Net cash inflow	55,000.00	0.16312	8,971.69
17	Net cash inflow	55,000.00	0.14564	8,010.44
18	Net cash inflow	55,000.00	0.13004	7,152.18
19	Net cash inflow	55,000.00	0.11611	6,385.87
20	Net cash inflow	55,000.00	0.10367	5,701.67
20	Salvage Value	1,00,000.00	0.10367	10,366.68
	NET PRESENT VALUE			-78,813.92

5. Quality Chocolate @ 14% with 30% tax

Year	Particular	Cash Flow	Tax @ 30%	Net Cash Flow	PV @ 14%	Dis. PV
0	Initial Investment	-2,00,000.00	-	-2,00,000.00	1.00000	-2,00,000.00
1	Net cash inflow	80,000.00	24,000.00	56,000.00	0.87719	49,122.81
2	Net cash inflow	80,000.00	24,000.00	56,000.00	0.76947	43,090.18
3	Net cash inflow	80,000.00	24,000.00	56,000.00	0.67497	37,798.40
4	Net cash inflow	80,000.00	24,000.00	56,000.00	0.59208	33,156.50
	NET PRESENT VALUE					-36,832.11