Basic Net Present Value Analysis

Jonathan Butler, process engineer, knows that the acceptance of a new process design will depend on its economic feasibility. The new process is designed to improve environmental performance. On the negative side, the process design requires new equipment and an infusion of working capital. The equipment will cost $1,200,000, and its cash operating expenses will total $270,000 per year. The equipment will last for 7 years but will need a major overhaul costing $120,000 at the end of the fifth year. At the end of 7 years, the equipment will be sold for $96,000. An increase in working capital totaling $120,000 will also be needed at the beginning. This will be recovered at the end of the 7 years.

On the positive side, Jonathan estimates that the new process will save $400,000 per year in environmental costs (fines and cleanup costs avoided). The cost of capital is 12%.

Required:

Question Content Area

Two present value tables are provided: Present Value of a Single Amount and Present Value of an Annuity. Use them as directed in the problem requirements.

Question Content Area

1. Prepare a schedule of cash flows for the proposed project. (Assume that there are no income taxes.) If an amount is negative or an outflow, first enter a minus sign (-).

Year 0
EquipmentEquipment operating costsRevenuesSalvage valueTotal	$- Select -
Operating expensesRevenuesSalvage valueTotalWorking capital	- Select -
Equipment operating costsRecovery of working capitalRevenuesSalvage valueTotal	$- Select -
Years 1-7
Cost savingsEquipmentExpensesTotalWorking capital	$- Select -
EquipmentEquipment operating costsSalvage valueTotalWorking capital	- Select -
EquipmentRecovery of working capitalSalvage valueTotalWorking capital	$- Select -
Year 5
EquipmentOverhaulSalvage valueTotalWorking capital	$- Select -
Year 7
EquipmentExpensesSalvage valueTotalWorking capital	$- Select -
EquipmentExpensesRecovery of working capitalTotalWorking capital	- Select -
EquipmentExpensesRevenuesTotalWorking capital	$- Select -