Question

2. The company is considering a project involving the purchase of new equipment. Change the data area of your worksheet to match the following: Use Exhibit 12B-1 and Exhibit 12B-2. (Use appropriate factor(s) from the tables provided.)

1 2 3 4 5 6 7 8 9 10 11 12 13	Chapter 12: Applying Excel Data Example E Cost of equipment needed $260,000 Working capital needed $60,000 Overhaul of equipment in four years $20,000 Salvage value of the equipment in five years $25,000 Annual revenues and costs: Sales revenues $420,000 Cost of goods sold $265,000 Out-of-pocket operating costs $65,000 Discount rate 18 %

a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Round your present value factor to 3 decimals and round all other intermediate calculations to nearest whole dollar.)

c. The internal rate of return is between what two whole discount rates (e.g., between 10% and 11%, between 11% and 12%, between 12% and 13%, between 13% and 14%, etc.)?

d. Reset the discount rate to 18%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value?

Answer 1

Solution a:

Computation of NPV
Particulars	Amount	Period	PV Factor	Present Value
Cash Outflows:
Cost of equipment	$260,000	0	1	$260,000.00
Working Capital	$60,000	0	1	$60,000.00
Overhaul cost	$20,000	4	0.516	$10,320.00
Present Value of Cash Outflows (A)				$330,320.00
Cash Inflows:
Annual cash inflows	$90,000	1-5	3.127	$281,430.00
Salvage Value	$25,000	5	0.437	$10,925.00
Release of working capital	$60,000	5	0.437	$26,220.00
Present Value of Cash Inflows (B)				$318,575.00
Net Present Value (B-A)				-$11,745.00

Solution c:

Computation of IRR
Period	Product A
	Cash Flows	IRR
0	-$320,000.00	16.50%
1	$90,000.00
2	$90,000.00
3	$90,000.00
4	$70,000.00
5	$175,000.00

IRR lies between 16% and 17%

Solution d:

Required salvage value = $25,000 + (Required present value to make NPV positive / PV factor at 18% for 5th period)

= $25,000 + ($11,745/ 0.437) = $51,876