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 13B-1 and Exhibit 13B-2. (Use appropriate factor(s) from the tables provided.)

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 17%. 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

Answer :

Step 1 Initial cash outlay = cost of equipment + working capital needed

= 180000 + 20000

= 200000

Step 2

Annual cash inflow

Sale revenue	385000
Less cost of goods sold	-260000
Less Out of pocket expenses	-75000
Annual net cash inflow	50000

Step 3

From present value table given,

Present value of annuity for $1 @ 17% for 5 years is 3.201

Present value factor for 4 th year @17% is 0.534

Present value factor for 5th year @17% is 0.456

Step 4

(a). We assume that working capital 20000 we be released at year end 5

Cash flows	Amount	Present value factors	Present value of cash flow
Annual cash flow	50000	3.201	160050
Overhaul cost at end of the year 4	-15000	0.534	-8010
Salvage value of equipment at the end of the year 5	35000	0.456	15960
Working capital release at the end of year 5	20000	0.456	9120
Present value of future cash flows			177120
Less initial cash outlay			-200000
Net present value			-22880

(c). IRR is a discount rate at which NPV hets zero.

It requires various trials at different discount rates. Just put present value factors in format of answer (a) and check for different rates or we can calculate it by using excel formula "IRR".

IRR of the present case is 12.35%

It means internal rate of return is between 12% and 13% .