Chapter 13: Applying Excel Data Example E Cost of equipment needed Working capital needed Overhaul of equipment in four years Salvage value of the equipment in five years Annual revenues and costs: Sales revenues Cost of goods sold Out-of-pocket operating costs Discount rate $60,000 $100,000 $5,000 $10,000 $200,000 $125,000 $35,000 14% Enter a formula into each of the cells marked with a ? below Exhibit 13-8 Years 3 Now 2 4 5 ? Purchase of equipment Investment in working capital Sales Cost of goods sold Out-of-pocket operating costs Overhaul of equipment Salvage value of the equipment Working capital released Total cash flows (a) Discount factor (14%) (b) Present value of cash flows (a) x (b) Net present value ? ? ? ? ? ? *Use the formulas from Appendix 13B: Present value of $1 = 1/(1+r)^n Present value of an annuity of $1 = (1/r)*(1-(1/(1+r)^n)) where n is the number of years and r is the discount rate EXHIBIT 13-8 The Net Present Value Method-An Extended Example A B C D E F G Year Now 2 3 4 5 3 Purchase of equipment $ 160,000) 4 Investment in working capital $ (100,000) 5 Sales $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 6 Cost of goods sold $(125,000) S (125,000) $(125,000) $(125,000) $ (125,000) 7 Out-of-pocket costs for salaries, advertising, etc. $ (35,000) $ (35,000) $ (35,000) $ (35,000) S (35,000) 8 Overhaul of equipment $ (5,000) 9 Salvage value of the equipment $ 10,000 10 Working capital released $ 100,000 11 Total cash flows (a) $ (160,000) $ 40,000 $ 40,000 $ 40,000 $ 35,000 $ 150,000 12 Discount factor (14%) (b) 1.000 0.877 0.769 0.675 0.592 S 0.519 13 Present value of cash flows (a) (b) $ (160,000) $ 35,080 $ 30,760 $ 27,000 $ 20,720 $ 77,850 14 Net present value (SUM B13:13) $ 31,410 15 16 Note: The discount factors come from Exhibit 13B-1 in Appendix 13B. 17 Exhibit 13-3 Exhibit 134 Exhibit 13-5 Exhbit 13- 6 E xhibit 13-7 Exhibit 13-8 Exhit For example, in cell C22 enter the formula "=B10". Note: The present value factors could be computed using the built-in Excel function PV, but we recommend using the formulas in Appendix 13B. Verify that your worksheet matches the example in the text. Check your worksheet by changing the discount rate to 10%. The net present value should now be between $56,518 and $56,535depending on the precision of the calculations. If you do not get an answer in this range, find the errors in your worksheet and correct them. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Save your completed Applying Excel form to your computer and then upload it here by clicking "Browse." Next, click "Save. You will use this worksheet to answer the questions in Part 2. 2. The company is considering a project involving the purchase of new equipment. Change the data area of your worksheet to match the following: Use Exhibit 13B-1 and Exhibit 13B-2. (Use appropriate factor(s) from the tables provided.) 1 Chapter 13: Applying Excel | 2 3 Data 4 Example E 5 Cost of equipment needed $ 250,000 6 Working capital needed $ 30,000 7 Overhaul of equipment in four years $ 30,000 8 Salvage value of the equipment in fives 30.000 years | 9 Annual revenues and costs: 10 Sales revenues $ 440,000 |11| Cost of goods sold $ 280,000 12 Out-of-pocket operating costs $ 80,000 13 Discount rate 16 % a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Round your present value factor to 3 decimals and round all other intermediate calculations to nearest whole dollar.) Answer is complete but not Net present s (10,820) value c. The internal rate of return is between what two whole discount rates (e.g., between 10% and 11%, between 11% and 12%, between 12% and 13%, between 13% and 14%, etc.)? Answer is complete and correct. The internal rate of return is between 100% and 159% | d. Reset the discount rate to 16%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value? Answer is complete but not entirely correct. Minimum salvage value required to generate a $ 52,7248 positive present value
