Question
In: Finance
Caroline's Candles would like to buy $134,000 of new candle-making equipment. However, the company has a...
Caroline's Candles would like to buy $134,000 of new candle-making equipment. However, the company has a major loan maturing in three years and needs this money at that time to avoid bankruptcy. The candle-making equipment is expected to increase the cash flows by $27,000 in the first year, $48,000 in the second year, and $69,000 a year for the following two years. Should Caroline's Candles buy the equipment at this time? Why or why not?
I need someone to show me how to do this problem in Excel, preferably with 2 tables of information. 1 with answers and 1 with how you find those answers using excel so I can follow along and teach myself.
Solutions
Expert Solution
| Year | Cash flows |
| 0 | -134000 |
| 1 | 27000 |
| 2 | 48000 |
| 3 | 69000 |
| 4 | 69000 |
| Net Income | 79000 |
As per the above analysis, the net income is positive.Hence the project is profitable. However this does not consider the time value of money.
Considering the time value, we compute the NPV of the cash flows at different rates of discount.
| Discount rate | NPV |
| 5% | 51622.97 |
| 10% | 29183.53 |
| 15% | 10592.75 |
| 20% | -4960.65 |
| 25% | -18089.60 |
We accept the project as long as the NPV is positive, else reject it.
WORKINGS
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