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.)

Answer 1

step 1- initial cash outlay cost of equipment + working capital needed 180000 +20000 200000 step 2- annual cash inflow sales revenue 385000 less cost of goods sold 260000 less out of pocket expenses 75000 annual net cash inflow 50000 step-3 from present value tables 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 5 th year @17 % is 0.456 step-4 answer a) we assume that working capital 20000 will be released at year end 5 presentpresent amountvaevalue cash flows factors cashflow annual cash flow 50000 3.201 160050 overhaul cost at end of year 4 15000 0.534 8010 salvage value of equipment at end of year 5 working capital release at end of year 5 35000 0.456 15960 9120 20000 0.456 present value of future cashflows 177120 -200000 less initial cash outla 22880 Net present value answer 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% ( ¡have calculated it using excel formula) It means internal rate of return is between 12% and 13% answer d) for bringing the net present value positive, present value of salvage value of equipment current present value of salvage - NPV present value of salvage value of equipment 15960 (-22880) 15960+22880 38840 Minimum salvage value required-38840 / present value factor @17% for 5th year Minimum salvage value required 38840/0.456 85176