Question
In: Accounting
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 |
 ekkarill92 answered 1 year agoRelated SolutionsSensitivity analysis: San Lucas Corporation San Lucas Corporation is considering investment in robotic machinery based upon...Sensitivity analysis: San Lucas Corporation
San Lucas Corporation is considering 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 a 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 $
b. Determine the net present value of...
You are performing a sensitivity analysis on an investment project and looking at the EXPECTED case...You are performing a sensitivity analysis on an investment
project and looking at the EXPECTED case of outcome. At t = 0, you
invest $5 million in a 10-year project and expect to receive a
revenue (sales) of $10 million each year. Variable cost is 75% of
revenue (sales) and the cost of capital is 8% p.a.
Using the straight-line depreciation method, determine the
depreciation per year. A. $ 500,000 B. $ 750,000 C. $ 1,000,000 D.
$ 1,500,000 E....
Explain how sensitivity and scenario analysis can be used as part of capital budgeting investment analysis.Explain how sensitivity and scenario analysis can be used as
part of capital budgeting investment analysis.
Somme plc (Somme) is considering an investment project which requires an initial investment in machinery of...Somme plc (Somme) is considering an investment project which
requires an initial investment in machinery of HK$40 million,
payable at the start of the first year of operation. At the end of
three years this machinery will be traded in for HK$3,000,000 and
if demand for the product is still strong new machinery will be
purchased.
The initial HK$40 million investment will attract capital
allowances at a rate of 20% per annum on a reducing balance basis.
The rate of...
Acme is considering a new project that requires an investment of $100 million in machinery. This...Acme is considering a new project that requires an investment of
$100 million in machinery. This is expected to produce earnings
before interest and taxes of $16 million per year for 4 years. The
machinery will be fully depreciated to a zero-book value over 4
years using straight-line depreciation. Working capital costs are
negligible. The tax rate is 25%. The unlevered cost of capital is
13%. They have a target debt ratio (debt/value) for the firm of
45%. Joker plans...
Spire is a nanosatellite and data analysis company based out of San Francisco. The company specialises...Spire is a nanosatellite and data analysis company based out of
San Francisco. The company specialises in gathering unique data
from small satellites in a low-earth orbit. Spire collect this
data, pull it down and through a network of ground stations, and
sell the Spire opened its European headquarters in Glasgow,
Scotland. Data, like that provided by Spire’s nanosatellites, can
be the key factor in fighting the extreme and unpredictable weather
events that cause so much destruction globally.
Scotland has...
Question 1. Cashion International (Sensitivity Analysis) Cashion International are considering a project that is susceptible to...Question 1. Cashion International (Sensitivity Analysis)
Cashion International are considering a project that is susceptible
to risk. An initial investment of £90,000 will be followed by three
years each with the following most likely cash flows The initial
investment consists of £70,000 in machines, which have a zero scrap
value at the end of the three year life of the project and £20,000
in additional working capital which is recoverable at the end. The
discount rate is 10%.
Sales (100,000...
You are considering an investment of $500,000 at time zero for machinery and equipment. Annual revenue...You are considering an investment of $500,000 at time zero for
machinery and equipment. Annual revenue produced by the machinery
is estimated to be $400,000 with annual operating costs of
$140,000. The investment requires an initial investment of $200,000
for working capital at time zero. The working capital return is
equal to the initial working capital investment at the end of the
project (8th year). Salvage value of the machinery and equipment is
expected to be zero. The minimum After...
You are considering an investment of $500,000 at time zero for machinery and equipment. Annual revenue...You are considering an investment of $500,000 at time zero for
machinery and equipment. Annual revenue produced by the machinery
is estimated to be $400,000 with annual operating costs of
$140,000. The investment requires an initial investment of $200,000
for working capital at time zero. The working capital return is
equal to the initial working capital investment at the end of the
project (8th year). Salvage value of the machinery and equipment is
expected to be zero. The minimum After...
Carper Company is considering a capital investment of $390,000 in additional productive facilities. The new machinery...Carper Company is considering a capital investment of $390,000
in additional productive facilities. The new machinery is expected
to have useful life of 6 years with no salvage value. Depreciation
is by the straight-line method. During the life of the investment,
annual net income and net annual cash flows are expected to be
$20,000 and $85,000, respectively. Carper has an 8% cost of capital
rate, which is the required rate of return on the investment.
Instructions (Round to two decimals.)...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|