B E G A B D F G 1 Chapter 14: Applying Excel 2 3 Data 4 Example E 5 Cost of equipment needed $120,000 6 Working capital needed $20,000 7 Overhaul of equipment in four years $5,000 8 Salvage value of the equipment in five years $40,000 9 Annual revenues and costs: 10 Sales revenues $360,000 11 Cost of goods sold $280,000 12 Out-of-pocket operating costs $60,000 13 Discount rate 10% 14 15 Enter a formula into each of the cells marked with a ? below 16 Exhibit 14-8 Years 18 Now 1 2 3 4 5 19 Purchase of equipment $ (120,000) 20 Investment in working capital $ (20,000) 21 Sales $ 360,000 $ 360,000 $ 360,000 $360,000 $ 360,000 22 Cost of goods sold $ (280,000) $ (280,000) $ (280,000) $ (280,000) $ (280,000) 23 Out-of-pocket operating costs $ (60,000) $ (60,000) $ (60,000) $ (60,000) $ (60,000) 24 Overhaul of equipment $ (5,000) 25 Salvage value of the equipment $ 40,000 26 Working capital released $ 20,000 27 Total cash flows (a) $ (140,000)| $ 20,000 $ 20,000 $ 20,000 $ 15,000 $ 80,000 28 Discount factor (14%) (b) 1.000 0.909 0.826 0.751 0.683 0.621 29 Present value of cash flows (a) x (b) $ (140,000) $ 18,180 $ 16,520 $ 15,020 $ 10,245 $ 49,680 30 Net present value $ (30,355) 17 31 d. Reset the discount rate to 10%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value? Minimum salvage value required to generate a positive present value