Question

Sensitivity analysis: San Lucas Corporation San Lucas Corporation is considering investment in robotic machinery based upon...

Sensitivity analysis: San Lucas Corporation

San Lucas Corporation is considering investment in robotic machinery based upon the following estimates:

Cost of robotic machinery $4,000,000
Residual value 300,000
Useful life 10 years

a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $700,000. Use the present value tables appearing in Exhibit 2 and 5 of this chapter.

Net present value $

b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $500,000, $700,000, and $900,000. Use the present value tables (Exhibit 2 and 5) provided in the chapter in determining your answer. If required, use the minus sign to indicate a negative net present value.

Annual Net Cash Flow $500,000 $700,000 $900,000
Net present value $ $ $

c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar.

Annual Net Cash Flow $

Homework Answers

Answer #1

(a)

Particulars Amount ($)
Present value of annual net cash flows $4,301,500
Present value of residual value $115,800
Total present value $4,417,300
Amount to be invested ($4,000,000)
Net present value $417,300

(b) Similar to above:

Annual net cash flow $ 500,000 $ 700,000 $900,000
Net Present Value -812,053.46 $ 417,300 $1,645,773.38

(c) minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10% = 632,300 $ each year

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