Question

ABC 1 2 3 4 5 6 7 8 9 10 11 12 13 Chapter 13: Applying Excel Data Example E Cost of equipment needed $230,000 Working capital needed $30,000 Overhaul of equipment in four years $20,000 Salvage value of the equipment in five years $25,000 Annual revenues and costs: Sales revenues $420,000 Cost of goods sold $270,000 Out-of-pocket operating costs $80,000 Discount rate 15 % What is the net present value of the project? 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.)? Reset the discount rate to 15%. 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

year	0	1	2	3	4	5
cost of equipment	-230000
working capital investment	-30000
annual revenue		420000	420000	420000	420000	420000
cost of goods sold		270000	270000	270000	270000	270000
operating cost		80000	80000	80000	80000	80000
operating profit		70000	70000	70000	70000	70000
overhaul expense					-20000
salvage value						25000
recovery of working capital						30000
net operating cash flow	-260000	70000	70000	70000	50000	125000
present value factor at 15% =1/(1+r)^n	1	0.869565217	0.756143667	0.6575162	0.571753246	0.497177
present value of cash flow = net operating cash flow*present value factor	-260000	60869.56522	52930.05671	46026.136	28587.66228	62147.09
NPV =sum of present value of cash flow	-9439.48761
IRR =Using IRR function in MS excel	IRR(C829:H829)	13.56%
IRR should be in the range of between 13% & 14%
Future value of amount of shortage of NPV to be positive	Shortage of amount for positive NPV*(1+r)^n r =15%	9439.4876*1.15^5	18986.18123
value of salvage value for positive NPV	18986.18+25000	43986.18