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.

3. In the Excel template, using Goal Seek, calculate this investment's internal rate of return. If the company's hurdle rate is 18% would it be likely to accept or reject the investment? Why?

4. What is the project's net present value when using a discount rate of 18%?

5. If the company wants to achieve an 18% return on this investment, what is the maximum amount that it can spend each year on fixed out-of-pocket operating costs? Use Goal Seek to compute your answer. Note: The fixed out-of-pocket operating costs remain constant for all five years, therefore modifying cell C13 automatically updates cells D13 through G13.

6. If the investment in working capital increased from $78,000 to $100,000 would you expect the internal rate of return to increase, decrease, or stay the same? No computations are necessary to answer this question.

7. Refer to the original data. Using Goal Seek, calculate the internal rate of return if the investment in working capital increases from $78,000 to $100,000. Note: Be sure to return the fixed out-of-pocket operating costs to the original value of $(200,000).

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/