Using Excel to calculate NPV Alpha Division is considering an investment proposal to purchase new equipment. The following data has been gathered. The cost to purchase the equipment is $500 000.

The equipment will have an expected life of three years and a disposal value at the end of the three years of $60 000. The company expects to sell the same amount of units per year but for a higher price with the result that there will be additional sales revenue of $300 000 per year for the first two years and $200 000 for the third year. Cash operating costs will increase by $30 000 per year.

Required:

1 Assuming a zero tax rate and the company’s discount rate is 8%, calculate the NPV of the project.

2 Assuming a zero tax rate and the company’s discount is 10%, calculate the NPV of the project.

3 Assuming a discount rate of 8%, what is the NPV for each of the following alternatives (treat each alternative independently):

a The equipment cost is changed to $600 000.

b The equipment now requires modifications in year 0 of $50 000.

c Cash operating costs increased by an additional $50 000 per year (i.e. total of $80 000 per year).