Question

d. Calculate the project's NPV (NOTE: The Excel NPV function may not work the same way as your calculator's NPV function. Make sure to use the Excel NPV function correctly). State whether the firm should accept or reject the project based on i. NPV Explain why you accepted or rejected the project based on NPV. In other words, what does it mean for the NPV to be positive or negative (whichever you calculated)? ii.

Answer 1

Based on the given inputs, we calculate the NPV in excel as given below, with formulas & calculations as shown in next screenshot (Please not that we have not included the 15,000 cost of old parts in this analysis since those are not being used in this project):

A B 14.29% 18.00 Inputs New Machine Old machine value (opportunity cost) Annual sales units Annual fixed costs Annual variable costs % of sales) NOWC 7,00,000 20,000 60,000 45,000 75% 50,000 Depriciation Rate Unit sales price Salvage value Tax Rate (T) 35% MARR 10% year New Machine $ -7,00,000.0 $ $ -50,000.0 -20,000.0 additional NOWC needed Old machine book value Annual revenues (Unit sales x price per unit) Annual fixed costs Variable costs Depriciation $ $ $ $ $ 10,80,000.0 45,000.0 8,10,000.0 1,00,000.0 1,25,000.0 $ $ $ $ $ 10,80,000.0 $ 10,80,000.0 45,000.0 $ 45,000.0 8,10,000.0 $ 8,10,000.0 1,00,000.0 $ 1,00,000.0 1,25,000.0 $ 1,25,000.0 $10,80,000.0 $ 45,000.0 $ 8,10,000.0 $ 1,00,000.0 $ 1,25,000.0 $10,80,000.0 $ 45,000.0 $ 8,10,000.0 $ 1,00,000.0 $ 1,25,000.0 $10,80,000.0 $ 45,000.0 $ 8,10,000.0 $ 1,00,000.0 $ 1,25,000.0 $10,80,000.0 $ 45,000.0 $ 8,10,000.0 $ 1,00,000.0 $ 1,25,000.0 Profit before tax (+Revenue-costs & deprcn.) $ $ 81,250.0 1,81,250.0 $ $ 81,250.0 1,81,250.0 $ $ 81,250.0 1,81,250.0 $ 81,250.0 $ 1,81,250.0 $ 81,250.0 $ 1,81,250.0 $ 81,250.0 $ 1,81,250.0 $ 81,250.0 $ 1,81,250.0 Profit after tax (=PBT X(1-T)) PAT + depriciation Terminal year salvage value After Tax Salvage value ((Sv-Bv) x (1-T)) NOWC recovery in terminal year Project free cash flows NPV $ 50,000.0 $ 2,31,250.0 $ 1,81,250.0 $ 1,81,250.0 $ 1,81,250.0 $ 1,81,250.0 $ 1,81,250.0 $ 1,81,250.0 $ -7,70,000.0 $ 1,38,058.8

Formula view (year 4-6 having similar formulas hidden in below screenshot):

=1/7 18 1 Inputs 2 New Machine 3 Old machine value (opportunity cost) 4 Annual sales units 5 Annual fixed costs 6 Annual variable costs (% of sales) 7 NOWC 700000 20000 60000 45000 0.75 50000 Depriciation Rate Unit sales price Salvage value Tax Rate (T) 0.35 MARR 0.1 year 0 --E2 --E7 -20000 10 New Machine 11 additional NOWC needed 12 Old machine book value 13 Annual revenues (Unit sales x price per unit) 14 Annual fixed costs 15 Variable costs 16 Depriciation 17 Profit before tax (=Revenue-costs & deprcn.) 18 Profit after tax (=PBT x(1-T)) 19 PAT + depriciation 20 Terminal year salvage value 21 After Tax Salvage value ((SV-Bv) x (1-T)) 22 NOWC recovery in terminal year 23 Project free cash flows 24 NPV =$E$4*$H$3 =$E$5 =F13*$E$6 =$E$2*$H$2 =F13-F14-F15-F16 =F17*(1-$H$5) =F18+F16 =$E$4*$H$3 =$E$5 =G13*$E$6 =$E$2*$H$2 =G13-G14-G15-G16 =G17*(1-$H$5) =G18+G16 =$E$4*$H$3 =$E$5 =H13*$E$6 =$E$2*$H$2 =H13-H14-H15-H16 =H17*(1-$H$5) =H18+H16 =$E$4*$H$3 =$E$5 =L13*$E$6 =$E$2*$H$2 =L13-L14-L15-L16 =L17*(1-SH$5) =L18+L16 =H4 =L20*(1-H5) =E7 =L10+L11+L12+L19+L21+L22 =G10+G11+G12+G19+G21+G22 =H10+H11+H12+H19+H21+H22 =E10+E11+E12+E19+E21+E22 =F10+F11+F12+F19+F21+F22 =NPV(H7,F23:L23) +E23

Part 1.

Since the NPV is positive in this case so the firm should accept the project.

Part2.

We accepted the project because the NPV is positive, this implies that this project will add value to the firm & since the goal of the management is to increase the firm's (& thus shareholders' ) value, so this project should be accepted.