Sensitivity analysis: San Lucas Corporation

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

Line Item Description Value

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 Exhibits $2$ and $5$ of this chapter.

Net present value fill in the blank $1$ of $1$$

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 $($Exhibits $2$ 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 $fill in the blank $2$ $fill in the blank $3$ $fill in the blank $4$

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 fill in the blank $1$ of $1$$

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.

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.