Question

KLM Flights are currrently in a financial crisis, and are looking at methods to decrease costs to stay afloat. The company is considering the purchase of a new computerised system that is expected to save the company $78,000 at the end of each year in reduced wages.

The system costs $254,000, plus another $11,000 to be installed. It is expected to last for five years after which it can be sold for $42,000. Operating expenses (such as electricity and maintenance) are $9,000 pa.

a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:

Time 0 1 2 3 4 5

Net Cash Flow ________ ______ _______ ______ __________ ____

b)Calculate the NPV if the required rate of return is 12% pa. NPV12% = $ ___________

c)Calculate the NPV if the required rate of return is 14% pa. NPV14% = $ __________

Answer 1

NPV can be found using NPV function in EXCEL

=NPV(rate,Year1 to Year5 cashflows)-Year0 cashflow

=NPV(12%, Year1 to Yesr5 cashflows)-265,000

NPV=$7561.49

=NPV(14%, Year1 to Year5 cashflows)-265,000

NPV=-$6303.93