SHOW ANSWERS IN EXCEL WITH FORMULAS

Projecting cash flows. Complete the cash flow projections for project #2. Assume the following:

• The project has a 10-year life.
• Revenues are $70,000 in year 1 and increase $5,000 per year thereafter.
• Operating expenses are 70% of revenues in each year.
• Initial equipment purchases are $100,000, depreciated on a 7-year MACRS schedule.
• Equipment purchased will have a resale value of $30,000 at the end of the project.
• The tax rate is expected to be 35% over the life of the project.
• The discount rate for the project is 11.5%
• Net working capital of $25,000 will need to be maintained over the life of the project.

2. Finding the NPV. Use the NPV function to find the NPV of the project.

Q3: Under the above assumptions, what is the NPV of this project?____________

3. Finding the IRR (in two ways). Use the Goal Seek tool to find the internal rate of return on this project. Recall that the IRR is the discount rate that makes the NPV=0. So in Goal Seek set the NPV to 0 by changing the discount rate. After finding the IRR using Goal Seek, verify the IRR using the IRR function (enter on line 31, below the NPV).

Q4: What is the IRR under the above assumptions?____________

4. Sensitivity analysis. Note on the spreadsheet that all green cells are assumptions that you can modify. Return the discount rate back to 11.5%. Now find the NPV of this project under the following alternative assumptions (change only one at a time, then change back before going to the next one):

Q5: Initial equipment purchases are $115,000 _______________

Q6: Sales in Year 1 are only $60,000, but still rise by $5,000 thereafter ___________

Q7: The equipment has no resale value _______________

Q8: The discount rate is 13% _______________