ensitivity analysis: San Lucas Corporation

San Lucas Corporation is considering investment in robotic machinery based upon the following estimates:

Cost of robotic machinery	$4,000,000
Residual value	300,000
Useful life	10 years

a. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $700,000. Use the present value tables appearing in Exhibit 2 and 5 of this chapter.

Net present value $

b. Determine the net present value of the equipment, assuming a desired rate of return of 10% and annual net cash flows of $500,000, $700,000, and $900,000. Use the present value tables (Exhibit 2 and 5) provided in the chapter in determining your answer. If required, use the minus sign to indicate a negative net present value.

Annual Net Cash Flow	$500,000	$700,000	$900,000
Net present value	$	$	$

c. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 10%. Round to the nearest dollar.

Annual Net Cash Flow $

d. San Lucas Corporation wishes to invest in a robotics project. Based on the information from the above requirements, at what cash flow should San Lucas Corporation accept the project?

(a) If the net cash flow is $700,000

(b) If the net cash flow is $900,000

(c) If the net cash flow is $500,000

(d) Both $700,000 and $900,000 net cash flow.

d

In the above given situation identify the statement that supports San Lucas Corporation's decision of accepting $700,000 and $900,000 net cash flows.

(a) The net cash inflow is higher and in turn increases the profitability of the business.

(b) The net present value and the cash flows are positive.

(c) The net present value can be ignored and the decision is based on the net cash inflow.

(d) None of the above.

b