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Safeco Insurance is considering a software equipement at a cost of $4,133,250. They expect this equipment...

Safeco Insurance is considering a software equipement at a cost of $4,133,250. They expect this equipment to produce cash flows of $822,432 , $463,965, $937,250, $1,017,112, $1,212,960, and $1,300,000 over the next six years. If the appropriate discount rate is 12 percent, what is the NPV of this investment? Would they go ahead with the project? If each cashflow is reduced by 20%, what is the new NPV at 12%? If each cashflow is increased by 20% , what is the new NPV at 12%? Share the results in a table, with the best case scenario, normal scenario and worst case scenario. Comment on these scenarios.

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Expert Solution

If the appropriate discount rate is 12 percent, what is the NPV of this investment?
=-4133250+822432/1.12+463965/1.12^2+937250/1.12^3+1017112/1.12^4+1212960/1.12^5+1300000/1.12^6=-368670.0194

Would they go ahead with the project?
No

If each cashflow is reduced by 20%, what is the new NPV at 12%?
=-4133250+(822432/1.12+463965/1.12^2+937250/1.12^3+1017112/1.12^4+1212960/1.12^5+1300000/1.12^6)*0.8=-1121586.016

If each cashflow is increased by 20% , what is the new NPV at 12%?
=-4133250+(822432/1.12+463965/1.12^2+937250/1.12^3+1017112/1.12^4+1212960/1.12^5+1300000/1.12^6)*1.2=384245.9767

Share the results in a table, with the best case scenario, normal scenario and worst case scenario.

The project is only acceptable in best case scenario.

NPV
Best Case 384246
Base Case -368670
Worst Case -1121586

jeff jeffy answered 2 years ago
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