Question

Please show your calculations

A company is considering the purchase of an industrial laser for $150,000. The device has a useful life of five years and a salvage (market) value of $30,000 at the end of those five years. Annual revenues are estimated to be $55,000 per year. Annual expenses are guaranteed to be $10,000 per year. Using a MARR = 18%, determine how sensitive the decision is to changes in the estimate of annual revenues? Express your answer as a percent change from the estimated value of $55,000. Write a sentence explaining the meaning of your answer.

Answer 1

NPV at $55,000 Estimated annual revenue.

year	cash inflow	cash outflow	Net cash flow (cash inflow + cash outflow)	Discount factor at 18%	Present Value (Net cash flow * Discount factor)
0	0	-150000	-150000	1	-150000
1	55000	-10000	45000	0.847	38115
2	55000	-10000	45000	0.719	32355
3	55000	-10000	45000	0.609	27405
4	55000	-10000	45000	0.516	23220
5	55000	-10000	45000	0.437	19665
5	30000		30000	0.437	13110
				NPV	3870

if Estimated annual revenue is 53762.79 then NPV is Zero. as calculated in below table.

year	cash inflow	cash outflow	Net cash flow	Discount factor at 18%	Present Value
0	0.00	-150000.00	-150000.00	1.000	-150000.00
1	53762.79	-10000.00	43762.79	0.847	37067.08
2	53762.79	-10000.00	43762.79	0.719	31465.44
3	53762.79	-10000.00	43762.79	0.609	26651.54
4	53762.79	-10000.00	43762.79	0.516	22581.60
5	53762.79	-10000.00	43762.79	0.437	19124.34
5	30000.00		30000.00	0.437	13110.00
				NPV	0.00

change in estimated annual revenue to NPV becoming zero is 55000-53762.79 = 1237.21

%age change is 1237.21/55000*100 = 2.25%

so estimated annual revenue is very sensitive. because only 2.25% change in that in negative way from $55,000 estimated annual revenue will recude the NPV to Zero(0). so if estimated revenue reduces more than 2.25% then this purchase of industrial laser will start to give negative returns.