30 S16 32 33 34 350 370 380 390 400 o Operating asset carrying value O Operating asset salvage value QUESTION 25 Using the data on pg. 9.19 in exhibit 9.7, determine the expected payback date in year 6 for the new printing press if O'Sullivan Printing uses a calendar year (assume no leap years are involved), and the asset is placed into service on January 1st of the first year. O March 18th March 19th O March 20th O December 31st QUESTION 26 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save: (Annual cash low X PVA 10.1) Net init investment SU (562,800 x PVA 10,1) - $303,525 = $0 $303,525 PVA 10,1 = 62,800 PVA 10,1 = 4.8332 Looking across the row for ten periods in the present value of an annuity table, we find a present value factor of 3 4.8332 in the 16% column. Thus, the internal rate of retum for the TopCap system is 16%. C&C's required rate of return is 12%, so with an internal rate of return of 16%, the project is acceptable. 1154 1896 Periods 1 2 3 10% 0.9091 135 ORSO 5% 09615 0.9524 1.8561 1.8594 1.8334 2.7751 2.72322.6730 3.629935460 3.4651 44518 4.3295 42124 0.8929 1.6901 7 0.9346 1.800 26243 3.3872 4.1002 8 0.9259 1.7833 2.5771 3121 3.9927 9% 0.9174 1.7591 2.5313 32397 3.8897 9009 1.7125 24437 3.1034 3.6959 17355 2.468 3.109 3.7907 14% IGE 0.8772 0.21 1.5457 1.652 2.3216 259 29137 2.72 3.4331 3043 1.6681 2.3612 20745 2.2018 3.0373 3.6048 4 08175 15656 2.1743 2.670 3.1272 $ 3:5172 4.7665 44859 43553 - 7 3.7 42 5.393 4.6229 52054 57456 3.976 2115 4 5.3421 5.0757 4.9173 6.0021 3.764 5824 6.732764632 62098 74353 7.1078 6.8017 40 7215760 8 9 4.2005 4.2122 5.1461 5.5370 5.0330 5.5345 5.9952 5.9713 3.9975 44226 4.795 $1317 5.319 41114 4.5638 4.9676 51282 54502 4.6189 5152 62469 5.7990 44065 LO 244941 Projects with Uneven Cash Flows Not many projects have even annual cash flows, as we saw when we analyzed O'Sullivan's decision whether to purchase new printing equipment. When the annual cash flows are uneven, you cannot use the apnuity table method to calculate the internal rate of return. One option is to do a series of net present value cllculations, until by trial and error you find the discount rate that results in a net present value of $o. Since we have already found that the project's net present value is greater than zero, we know that its internal rate of return must be greater than the 12% discount rate. We might begin with a 13% discount rate, which yields a net present value of $1,104 as shown in Exhibit 9.8. Since the internal rate of return results in a net present value greater than $o, we need to try a higher discount rate to lower the net present value. Trying a 14% discount rate yields a negative net present value of ($1,011). So the project must have an internal rate of return somewhere between 13% and 14% (See Watch Out! D 1 Cash Flow Time Period 13% Discount Rate 14% Discount Rate 2 Purchase price S (60.000) 0 $ (60,000) $ 160,000) 3: Operating cost savings $ 9,000 1-10 48.836 46.945 4 Overhaul avoided $ 10.000 2 7,831 7,695 5 Salvage of old equipment $ 3,000 0 3,000 3,000 6 Salvage of new equipment S 5.000 10 1.349 7 Net present value $ 1.1045 11.011) EXHIBIT 9.8 Trial-and-error calculation of the internal rate of return, O'Sullivan Printing tv O EXHIBIT 9.7 Using Microsoft Excel's NPV function to calculate net present value. Assumptions of the Net Present Value Model Like most models, the net present value model makes several assumptions. In our examples, we assumed that we knew exactly when, and in what amounts, the cash flows occurred. In reality, however, cash flows are difficult to predict with accuracy. After all, how sure can we be about an event that will happen ten years from now? And we made no allowance for inflation. We also assumed that all cash flows occurred at the end of the year. Of course, this isn't usually the case; cash flows typically occur throughout the year. But making this assumption simplifies the calculations. Finally, we assumed that as cash inflows from the project were received, they were reinvested in another project earning a return equal to the discount rate. Internal Rate of Return Another discounted cash flow method yields a project's internal rate of return (IRR), or the actual return expected to be earned by the project. Like net present value, the internal rate of return considers the amount and 3 organization's discount rate, or minimum required rate of return. If the internal rate of return is greater than or equal to the company's discount rate, the project is acceptable. If the internal rate of return is less than the company's discount rate, the project should be rejected. IRR Value Compare to NPV Project Acceptable? > discount rate NPV >0 Yes = discount rate NPV = 0 Yes discount rate NPV >0 Yes = discount rate NPV = 0 Yes