The Excel worksheet form that follows is to be used to recreate Example E and Exhibit 8-7.

Question:

The Excel worksheet form that follows is to be used to recreate Example E and Exhibit 8-7. Download the workbook containing this form from Connect. On the website you will also receive instructions about how to use this worksheet form.

EXHIBIT 8-7: The Net Present Value Method-An Extended Example

EXHIBIT 8-8: Evaluation of the Mower Using a 12% Discount Rate

You should proceed to the requirements below only after completing your worksheet. Note that you may get a slightly different net present value from that shown in the text due to the precision of the calculations.
Required:
1. Check your worksheet by changing the discount rate to 10%. The net present value should now be between $56,495 and $56,518-depending on the precision of the calculations. If you do not get an answer in this range, find the errors in your worksheet and correct them.
Explain why the net present value has increased as a result of reducing the discount rate from 14% to 10%.
2. The company is considering another project involving the purchase of new equipment. Change the data area of your worksheet to match the following:
a. What is the net present value of the project?
Data
Example E
Cost of equipment needed .................................... $120,000
Working capital needed ..........................................$80,000
Overhaul of equipment in four years .......................... $40,000
Salvage value of the equipment in five
years .............................................................. $20,000
Annual revenues and costs:
Sales revenues ................................................... $255,000
Cost of goods sold ............................................... $160,000
Out-of-pocket operating costs ................................... $50,000
Discount rate ............................................................ 14%
b. Experiment with changing the discount rate in one percent increments (e.g., 13%, 12%, 15%, etc.). At what interest rate does the net present value turn from negative to positive?
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.)?
d. Reset the discount rate to 14%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value?

Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...

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