Question

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 $

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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