EXHIBIT 14-8 The Net Present Value Method-An Extended Example F 2 A B D E F G 1 Year 2 Now 1 2 3 5 3 Purchase of equipment $ (60,000) 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) $ (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) $ (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 $ 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 B13:613) $ 31,410 15 16 Note: The discount factors come from Exhibit 14B-1 in Appendix 148. 17 Exhibit 14-8 Exhibit 14-9 Exhibit 14-10 Exhibit 14-11 Exhibiti Source: Microsoft Excel 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 14B-1 and Exhibit 14B-2. (Use appropriate factor(s) from the tables provided.) A B 1 Chapter 14: Applying Excel 2 3 Data $ 4 Example E 5 Cost of equipment needed 6 Working capital needed 7 Overhaul of equipment in four years 8 Salvage value of the equipment in five years 9 Annual revenues and costs: 140,000 55,000 15,000 35,000 $ $ 10 Sales revenues $ 11 $ 365,000 240,000 85,000 13 % Cost of goods sold Out-of-pocket operating costs Discount rate 12 $ 13 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.) Net present 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.)? The internal rate of return is between % and % d. Reset the discount rate to 13%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value? Minimum salvage value required to generate a positive present value