Sensitivity analysis: San Lucas Corporation

San Lucas Corporation is considering an 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 the 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 $417,300 (???)

b. Determine the net present value of the equipment, assuming the 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 the desired rate of return of 10%. Round to the nearest dollar.

Annual Net Cash Flow $__________

Exhibit 2:

Exhibit 5:

Year 6% 20% 1 2 3 4 5 6 7 8 9 10 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 Present Value of $1 at Compound Interest 10% 12% 0.909 0.893 0.826 0.797 0.751 0.712 0.683 0.636 0.621 0.567 0.564 0.507 0.513 0.452 0.467 0.404 0.424 0.361 0.386 0.322 15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 Year 1 2 3 4 5 6 7 8 9 10 Present Value of an Annuity of $1 at Compound Interest 6% 10% 12% 15% 0.943 0.909 0.893 0.870 1.833 1.736 1.690 1.626 2.673 2.487 2.402 2.283 3.465 3.170 3.037 2.855 4.212 3.791 3.605 3.353 4.917 4.355 4.111 3.785 5.582 4.868 4.564 4.160 6.210 5.335 4.968 4.487 6.802 5.759 5.328 4.772 7.360 6.145 5.650 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192