Your manager is proposing a new investment. If the company pursues the investment, it will cost...

Your manager is proposing a new investment. If the company pursues the investment, it will cost $300,000 today. It has an expected life of 10 years and no salvage value. Annual expenses are estimated to be $30,000 per year. Annual revenue increases are estimated to be $70,000 per year. Your company must borrow 1/3 of the investment cost. The bank has agreed to six equal annual payments, with the first payment due at the end of year 1. The company's MARR is 10% compounded annually. The loan interest rate is 12% compounded annually.

create in excel file

a) How much is the loan payment?

b) What is the present worth of this investment opportunity?

c) Based on the present worth analysis, should the company make the investment? Why or why not?

Expert Solution

Using Excel

Year	investment	Loan payment	Annual revenue	Annual cost	Net cash flow
0	-200000				-2,00,000.00
1		-24,322.57	70,000.00	-30,000.00	15,677.43
2		-24,322.57	70,000.00	-30,000.00	15,677.43
3		-24,322.57	70,000.00	-30,000.00	15,677.43
4		-24,322.57	70,000.00	-30,000.00	15,677.43
5		-24,322.57	70,000.00	-30,000.00	15,677.43
6		-24,322.57	70,000.00	-30,000.00	15,677.43
7			70,000.00	-30,000.00	40,000.00
8			70,000.00	-30,000.00	40,000.00
9			70,000.00	-30,000.00	40,000.00
10			70,000.00	-30,000.00	40,000.00
				NPW	-60,148.46

A. Annual Loan payment for 6 years = 24322.57

B. NPW = -60148.46

C. This project should not be selected as NPW is negative

Showing formula

Year	investment	Loan payment	Annual revenue	Annual cost	Net cash flow
0	-200000				=B3+C3+D3+E3
1		=PMT(12%,6,100000)	70000	-30000	=B4+C4+D4+E4
2		=PMT(12%,6,100000)	70000	-30000	=B5+C5+D5+E5
3		=PMT(12%,6,100000)	70000	-30000	=B6+C6+D6+E6
4		=PMT(12%,6,100000)	70000	-30000	=B7+C7+D7+E7
5		=PMT(12%,6,100000)	70000	-30000	=B8+C8+D8+E8
6		=PMT(12%,6,100000)	70000	-30000	=B9+C9+D9+E9
7			70000	-30000	=B10+C10+D10+E10
8			70000	-30000	=B11+C11+D11+E11
9			70000	-30000	=B12+C12+D12+E12
10			70000	-30000	=B13+C13+D13+E13
				NPW	=NPV(10%,F4:F13)+F3

Rahul Sunny answered 1 year ago

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