Question

KLM Flights are currrently in a financial crisis, and are looking at methods to decrease costs to stay afloat. The company is considering the purchase of a new computerised system that is expected to save the company $76,000 at the end of each year in reduced wages.

The system costs $252,000, plus another $19,000 to be installed. It is expected to last for five years after which it can be sold for $46,000. Operating expenses (such as electricity and maintenance) are $9,000 pa.

a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:

Time	0	1	2	3	4	5
Net Cash Flow

b)Calculate the NPV if the required rate of return is 10% pa.

NPV_10% = $

c)Calculate the NPV if the required rate of return is 12% pa.

NPV_12% = $

Answer 1

Time	0	1	2	3	4	5
Net Cash Flow	-(252,000 + 19,000)= -271,000	76,000-9,000= +$67,000	76,000 - 9,000= +$67,000	76,000-9,000= +$67,000	76,000-9,000= +$67,000	76,000-9,000+46000= +$113,000

b.)Calculation of NPV if Required Rate of Return @10%

Year	Cash Flows	PVF @10%	Discounted Cash Flows
1	67000	0.90909090909	60909.090909
2	67000	0.82644628099	55371.9008263
3	67000	0.7513148009	50338.0916603
4	67000	0.68301345536	45761.9015091
5	113000	0.62092132305	70164.1095046
		Total	282545.094408

Total Present Value of Cash Inflow	282545.094408
(-) Present Value of Cash Outflow	(271,000)
Net present Value	11,545.094408

Calculation of NPV if Required Rate of Return @12%

Year	Cash Flows	PVF @12%	Discounted Cash Flows
1	67000	0.89285714285	59821.4285709
2	67000	0.79719387754	53411.9897951
3	67000	0.7117802478	47689.2766026
4	67000	0.63551807839	42579.7112521
5	113000	0.5674268557	64119.2346941
		Total	267621.640914

Total Present Value of Cash Inflow	267621.640914
(-) Present Value of Cash Outflow	(271,000)
Net present Value	-3378.359086