how did we get PVN20% in answer 2

Share Comments 1) First calculate depreciation as you will have to remove this from cash inflows: Cost of the equipment $100,000 Less: Salvage value (10%) ($10,000 Net depreciable cost $90,000 $90,000 + 12 years = $7,500 per year depreciation $127,500 - $7,500 depreciation = $120,000 cash fixed expenses The net cash inflow for each year would be: Year 4-12 Sales in units 4,000 7,000 10,000 12,000 Sales in dollars $180,000 $315,000 $450,000 $540,000 (X 545 each) Less: Variable expenses: ($100,000) ($175,000) ($250,000) ($300,000) (* $25 each) Contribution margin $80,000 $140,000 $200,000 $240,000 Less: Fixed expenses: Advertising ($70,000) ($70,000) ($50,000) ($40.000) Other fixed expenses ($120,000) ($120,000) ($120.000) ($120,000) Total fixed expenses ($190,000) ($190,000) ($170,000) ($160.000) Net cash inflow (outflow) ($110,000) $(50,000) $30,000 $80,000 2) The net present value of the proposed investment would be: Item Year (s) Amount of 204% Present Cash Flows Factor Value of Cash Flows Investment in equipment NOW (5100,000) 1.000 (5100,000) Working capital investment Now ($40.000) 1.000 (540,000) Yearlycash flows ($110,000) 0.833 (591,630) Yearlycash flows ($50,000) 0.694 ($34,700) Yearlycash flows 530,000 0.579 $17,370 Yearlycash flows 4-12 $80.000 2.333 $186.640 Salvage value of equipment $10.000 0.112 $1,120 Release of working capital $40,000 0.112 $4.480 Net present value ($56.720) The company should not accept the new project; net present value is negative