Question

PLEASE SHOW THE CALCULATOR INPUTS for the below work:

Woods Company is considering the purchase of some equipment. The initial investment will be $100,000. The estimated useful life of the equipment will be 5 years, at which point it will have a zero terminal salvage value. The annual savings in cash operating costs will equal $19,000, and the company has a minimum desired rate of return of 12%. Use straight-line depreciation and ignore income taxes.

Compute:

a. Net Present Value

b. Payback Period

Answer 1

Annual depreciation Expense = asset cost/useful life

                                                           = 100000/ 5 = 20000/ year

Cost saving per year from the asset is 19000 per year, however dep[recitation is on non cash expense so we will add back depreciation to the cash saving

Operating cash flow = 19000 + 20000 = 39000/ year

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NPV

NPV is the difference between present value of all cash inflow and initial cost of asset or project.

All the future cash flows are discounted using discounting rate or required rate and the sum of all the discounted cash flows will be subtracted with initial cost.

NPV = PV of future cash inflow - initial cost

Pls refer below table for NPV calculation,

Year	Cash Inflow	PV factor	PV of cash flow
1	39000	0.892857	34821.42857
2	39000	0.797194	31090.56122
3	39000	0.711780	27759.42966
4	39000	0.635518	24785.20506
5	39000	0.567427	22129.64737
		Total	140586.2719
		Initial cost	100000
		NPV	40586.27189

NPV = 40586.27

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Payback period is the time it takes for a project to return the initial capital, Payback period is different than discounted payback in which cash flows are discounted first with required rate of return/discount rate, in payback period method cash flows are not discounted.

Payback period = 100000/39000 = 2.56 years

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Hope this answer your query.

Feel free to comment if you need further assistance. J