Eisner Company has an opportunity to manufacture and sell a new product for a five-year period. The company estimated the following costs and revenues for the new product:

Cost of new equipment $ 420,000 Initial working capital required $ 78,000 Overhaul of the equipment after three years $ 50,000 Salvage value of the equipment after five years $ 30,000 Annual revenues and costs:

Sales $ 850,000 Variable expenses $ 500,000 Fixed out-of-pocket operating costs $ 194,000

When the project concludes in five years the working capital will be released for investment elsewhere in the company.

Click here to download the Excel template, which you will use to answer the questions that follow.

Click here for a brief tutorial on Goal Seek in Excel.

2. Refer to the Excel template.

a. Why does cell B7 have an $78,000 cash outflow, whereas cell G10 shows the same $78,000 as a cash inflow?

b. Will the value of 1.000 that is shown in cell B15 stay constant or change as the Excel template is used to calculate the internal rate of return? Why?

c. Will the values of 1.000 that are shown in cells C15 through G15 stay constant or change as the Excel template is used to calculate the internal rate of return? Why?

d. Will the discount factors in cells C15 through G15 increase or decrease as the discount rate in cell B3 increases? Why?

e. Once the discount rate in cell B3 is changed to some percentage greater than zero, will the amount shown in cell C16 always be greater than or less than the amount shown in cell F16? Why?

f. Would it be correct to conclude that this project has a net present value of $340,000 given that this is the amount currently shown in cell B17? Why?

g. Once this template has been used to calculate the internal rate of return, what dollar amount will appear in cell B17?

Font Alignment X V fx Number TS Styles Cells Editing Ideas A B C D E F G Blue cells can be modified Int rate 0.0% Now 1 ase of equipment 2 3 4 5 (420,000) stment in working capital S (78,000) rhaul of equipment $ (50,000) age value of the equipment 30,000 rking capital released 78,000 es $ 850,000 $ 850,000 $ 850,000 $ 850,000 un 850,000 riable expenses $ (500,000) $ (500,000) $ (500,000) $ (500,000) $ (500,000) ed out-of-pocket operating costs $ (200,000) $ (200,000) $ (200,000) $ (200,000) $ (200,000) tal cash flows (a) $ (498,000) $ 150,000 $ 150,000 $ 100,000 $ 150,000 $ 258,000 scount factor (b) 1.000 1.000 1.000 1.000 1.000 1.000 esent value of cash flows (a) x (b) (498,000) $ 150,000 $ 150,000 $ 100,000 $ 150,000 $ 258,000 let present value (SUM B16:G16) 310,000 Goal Seek Template + W 10/