Chapter 8: Applying Excel

Data
Example E
Cost of equipment needed $60,000
Working capital needed $100,000
Overhaul of equipment in four years $5,000
Salvage value of the equipment in five years $10,000
Annual revenues and costs:
Sales revenues $200,000
Cost of goods sold $125,000
Out-of-pocket operating costs $35,000
Discount rate 14%

Enter a formula into each of the cells marked with a ? below

Exhibit 8-6
Years
Now 1 2 3
Purchase of equipment ($60,000)
Investment in working capital ($100,000)
Sales $200,000 $200,000 $200,000
Cost of goods sold ($125,000) ($125,000) ($125,000)
Out-of-pocket operating costs ($35,000) ($35,000) ($35,000)
Overhaul of equipment
Salvage value of the equipment
Working capital released
Total cash flows (a) ($160,000) $40,000 $40,000 $40,000
Discount factor (14%) (b) 1 0.877192982 0.769467528 0.674971516
Present value of cash flows (a) x (b) ($160,000) $35,087.72 $30,778.70 $26,998.86
Net present value $31,493

*Use the formulas from Appendix 13B:

Present value of $1 = 1/(1+r)^n
Present value of an annuity of $1 = (1/r)*(1-(1/(1+r)^n))
where n is the number of years and r is the discount rate
Years
4 5

$200,000 $200,000
($125,000) ($125,000)
($35,000) ($35,000)
($5,000)
$10,000
$100,000
$35,000 $150,000
0.592080277 0.519368664
$20,722.81 $77,905.30
REQUIREMENT #1

Data
Example E
Cost of equipment needed $60,000
Working capital needed $100,000
Overhaul of equipment in four years $5,000
Salvage value of the equipment in five years $10,000
Annual revenues and costs:
Sales revenues $200,000
Cost of goods sold $125,000
Out-of-pocket operating costs $35,000
Discount rate 10%

Enter a formula into each of the cells marked with a ? below

Exhibit 8-6
Years
Now 1 2 3
Purchase of equipment ($60,000)
Investment in working capital ($100,000)
Sales $200,000 $200,000 $200,000
Cost of goods sold ($125,000) ($125,000) ($125,000)
Out-of-pocket operating costs ($35,000) ($35,000) ($35,000)
Overhaul of equipment
Salvage value of the equipment
Working capital released
Total cash flows (a) ($160,000) $40,000 $40,000 $40,000
Discount factor (14%) (b) 1 0.909090909 0.826446281 0.7513148009
Present value of cash flows (a) x (b) ($160,000) $36,363.64 $33,057.85 $30,052.59
Net present value $56,518
 ANS/ when we decrease the discount rate to 10%,our net present value increases and this is becau
net present value is inversely proportional to discount rate

Years
4 5

$200,000 $200,000
($125,000) ($125,000)
($35,000) ($35,000)
($5,000)
$10,000
$100,000
$35,000 $150,000
0.683013455 0.62092132
$23,905.47 $93,138.20
creases and this is because
REQUIREMENT #2 part a.

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%

Enter a formula into each of the cells marked with a ? below

Exhibit 8-6
Years
Now 1 2
Purchase of equipment ($120,000)
Investment in working capital ($80,000)
Sales $255,000 $255,000
Cost of goods sold ($160,000) ($160,000)
Out-of-pocket operating costs ($50,000) ($50,000)
Overhaul of equipment
Salvage value of the equipment
Working capital released
Total cash flows (a) ($200,000) $45,000 $45,000
Discount factor (14%) (b) 1 0.877192982456 0.7694675285
Present value of cash flows (a) x (b) ($200,000) $39,473.68 $34,626.04
Net present value ($17,258)
Years
3 4 5

$255,000 $255,000 $255,000

($160,000) ($160,000) ($160,000)
($50,000) ($50,000) ($50,000)
($40,000)
$20,000
$80,000
$45,000 $5,000 $145,000
0.67497152 0.592080277 0.51936866436
$30,373.72 $2,960.40 $75,308.46
REQUIREMENT #2 part b. and part c.

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 10%

Enter a formula into each of the cells marked with a ? below

Exhibit 8-6
Years
Now 1 2 3
Purchase of equipment ($120,000)
Investment in working capital ($80,000)
Sales $255,000 $255,000 $255,000
Cost of goods sold ($160,000) ($160,000) ($160,000)
Out-of-pocket operating costs ($50,000) ($50,000) ($50,000)
Overhaul of equipment
Salvage value of the equipment
Working capital released
Total cash flows (a) ($200,000) $45,000 $45,000 $45,000
Discount factor (14%) (b) 1 0.9090909091 0.826446281 0.751314801
Present value of cash flows (a) x (b) ($200,000) $40,909.09 $37,190.08 $33,809.17
Net present value $5,357
 ANS/ until the discount rate of 11% the net present value stays negative but from a discount rate
the net present value becomes positive.

part c. the internal rate of return is between 10%-11%.

Years
4 5

$255,000 $255,000
($160,000) ($160,000)
($50,000) ($50,000)
($40,000)
$20,000
$80,000
$5,000 $145,000
0.683013455 0.620921323
$3,415.07 $90,033.59
negative but from a discount rate of 10% or lower,
REQUIREMENT #2, part d.

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 $55,000
Annual revenues and costs:
Sales revenues $255,000
Cost of goods sold $160,000
Out-of-pocket operating costs $50,000
Discount rate 10%

Enter a formula into each of the cells marked with a ? below

Exhibit 8-6
Years
Now 1 2 3
Purchase of equipment ($120,000)
Investment in working capital ($80,000)
Sales $255,000 $255,000 $255,000
Cost of goods sold ($160,000) ($160,000) ($160,000)
Out-of-pocket operating costs ($50,000) ($50,000) ($50,000)
Overhaul of equipment
Salvage value of the equipment
Working capital released
Total cash flows (a) ($200,000) $45,000 $45,000 $45,000
Discount factor (14%) (b) 1 0.909090909 0.82644628 0.7513148
Present value of cash flows (a) x (b) ($200,000) $40,909.09 $37,190.08 $33,809.17
Net present value $27,089
 ANS/ increasing salvage value, makes the net present value positive.

Years
4 5

$255,000 $255,000
($160,000) ($160,000)
($50,000) ($50,000)
($40,000)
$55,000
$80,000
$5,000 $180,000
0.683013455 0.620921323
$3,415.07 $111,765.84