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Sensitivity analysis: San Lucas Corporation San Lucas Corporation is considering an investment in robotic machinery based...
Sensitivity analysis: San Lucas Corporation
San Lucas Corporation is considering an investment in robotic machinery based upon the following estimates:
| Cost of robotic machinery | $4,000,000 |
| Residual value | 300,000 |
| Useful life | 10 years |
a. Determine the net present value of the equipment, assuming the desired rate of return of 10% and annual net cash flows of $700,000. Use the present value tables appearing in Exhibit 2 and 5 of this chapter.
Net present value $417,300
b. Determine the net present value of the equipment, assuming the desired rate of return of 10% and annual net cash flows of $500,000, $700,000, and $900,000. Use the present value tables (Exhibit 2 and 5) provided in the chapter in determining your answer. If required, use the minus sign to indicate a negative net present value.
| Annual Net Cash Flow | $500,000 | $700,000 | $900,000 |
| Net present value | $_____ | $_____ | $_____ |
c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming the desired rate of return of 10%. Round to the nearest dollar.
Annual Net Cash Flow $__________
Solutions
Expert Solution
| a | |||
| Year | Cash Inflows | Discounting factor @10% | Net Present Value |
| 0 | -40,00,000 | 1 | -40,00,000 |
| 1 | 7,00,000 | 0.909 | 6,36,300 |
| 2 | 7,00,000 | 0.826 | 5,78,200 |
| 3 | 7,00,000 | 0.751 | 5,25,700 |
| 4 | 7,00,000 | 0.683 | 4,78,100 |
| 5 | 7,00,000 | 0.621 | 4,34,700 |
| 6 | 7,00,000 | 0.564 | 3,94,800 |
| 7 | 7,00,000 | 0.513 | 3,59,100 |
| 8 | 7,00,000 | 0.467 | 3,26,900 |
| 9 | 7,00,000 | 0.424 | 2,96,800 |
| 10 | 7,00,000 | 0.386 | 2,70,200 |
| 10 | 3,00,000 | 0.386 | 1,15,800 |
| Net Present Value | 4,16,600 |
| b | |||||||||||||
| Annual Net Cashinflow | 5,00,000.00 | Annual Net Cashinflow | 7,00,000.00 | Annual Net Cashinflow | 9,00,000.00 | ||||||||
| Year | Cash Inflows | Discounting factor @10% | Net Present Value | Year | Cash Inflows | Discounting factor @10% | Net Present Value | Year | Cash Inflows | Discounting factor @10% | Net Present Value | ||
| 0 | -40,00,000 | 1 | -40,00,000 | 0 | -40,00,000 | 1 | -40,00,000 | 0 | -40,00,000 | 1 | -40,00,000 | ||
| 1 | 5,00,000 | 0.909 | 4,54,500 | 1 | 7,00,000 | 0.909 | 6,36,300 | 1 | 6,32,194 | 0.909 | 5,74,664 | ||
| 2 | 5,00,000 | 0.826 | 4,13,000 | 2 | 7,00,000 | 0.826 | 5,78,200 | 2 | 9,00,000 | 0.826 | 7,43,400 | ||
| 3 | 5,00,000 | 0.751 | 3,75,500 | 3 | 7,00,000 | 0.751 | 5,25,700 | 3 | 9,00,000 | 0.751 | 6,75,900 | ||
| 4 | 5,00,000 | 0.683 | 3,41,500 | 4 | 7,00,000 | 0.683 | 4,78,100 | 4 | 9,00,000 | 0.683 | 6,14,700 | ||
| 5 | 5,00,000 | 0.621 | 3,10,500 | 5 | 7,00,000 | 0.621 | 4,34,700 | 5 | 9,00,000 | 0.621 | 5,58,900 | ||
| 6 | 5,00,000 | 0.564 | 2,82,000 | 6 | 7,00,000 | 0.564 | 3,94,800 | 6 | 9,00,000 | 0.564 | 5,07,600 | ||
| 7 | 5,00,000 | 0.513 | 2,56,500 | 7 | 7,00,000 | 0.513 | 3,59,100 | 7 | 9,00,000 | 0.513 | 4,61,700 | ||
| 8 | 5,00,000 | 0.467 | 2,33,500 | 8 | 7,00,000 | 0.467 | 3,26,900 | 8 | 9,00,000 | 0.467 | 4,20,300 | ||
| 9 | 5,00,000 | 0.424 | 2,12,000 | 9 | 7,00,000 | 0.424 | 2,96,800 | 9 | 9,00,000 | 0.424 | 3,81,600 | ||
| 10 | 5,00,000 | 0.386 | 1,93,000 | 10 | 7,00,000 | 0.386 | 2,70,200 | 10 | 9,00,000 | 0.386 | 3,47,400 | ||
| 10 | 3,00,000 | 0.386 | 1,15,800 | 10 | 3,00,000 | 0.386 | 1,15,800 | 10 | 3,00,000 | 0.386 | 1,15,800 | ||
| Net Present Value | -8,12,200 | Net Present Value | 4,16,600 | Net Present Value | 14,01,964 |
| C. For Postive NPV |
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Residual value
300,000
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