D. Year Now 3 Purchase of equipment 4 Investment in working capital 5 Sales 6 Cost of goods sold 7 Out-of-pocket costs for salaries, advertising, etc. 8 Overhaul of equipment 9 Salvage value of the equipment $ (60,000) S (100,000) S 200,000 $ 200,000 $ 200,000 S 200,000 $ 200,000 $125,000) S(125,000) S(125,000) $(125,000) $(125,000) $ 135,000) S (35,000) S (35,000) S (35,000) S (35,000) $ (5,000) 10 Working capital reieased 11 Total cash flows (a) 12 Discount factor (14%) (b) 13 Present value of cash flows (a) x (b) S 10,000 $ 100,000 $ (160,000) S 40,000 S 40,000 $ 40,000 S 35,000 $ 150,000 1.000 0.877 0.769 0.675 0.592 $ 0.519 S (160,000) S 35,080 $ 30,760 $ 27,000 S 20,720 $ 7,850 31,410 14 Net present value (SUM B13:G13) 15 16 Note: The discount factors come from Exhibit 138-1 in Appendb 138.
D. Year Now 3 Purchase of equipment 4 Investment in working capital 5 Sales 6 Cost of goods sold 7 Out-of-pocket costs for salaries, advertising, etc. 8 Overhaul of equipment 9 Salvage value of the equipment $ (60,000) S (100,000) S 200,000 $ 200,000 $ 200,000 S 200,000 $ 200,000 $125,000) S(125,000) S(125,000) $(125,000) $(125,000) $ 135,000) S (35,000) S (35,000) S (35,000) S (35,000) $ (5,000) 10 Working capital reieased 11 Total cash flows (a) 12 Discount factor (14%) (b) 13 Present value of cash flows (a) x (b) S 10,000 $ 100,000 $ (160,000) S 40,000 S 40,000 $ 40,000 S 35,000 $ 150,000 1.000 0.877 0.769 0.675 0.592 $ 0.519 S (160,000) S 35,080 $ 30,760 $ 27,000 S 20,720 $ 7,850 31,410 14 Net present value (SUM B13:G13) 15 16 Note: The discount factors come from Exhibit 138-1 in Appendb 138.
D. Year Now 3 Purchase of equipment 4 Investment in working capital 5 Sales 6 Cost of goods sold 7 Out-of-pocket costs for salaries, advertising, etc. 8 Overhaul of equipment 9 Salvage value of the equipment $ (60,000) S (100,000) S 200,000 $ 200,000 $ 200,000 S 200,000 $ 200,000 $125,000) S(125,000) S(125,000) $(125,000) $(125,000) $ 135,000) S (35,000) S (35,000) S (35,000) S (35,000) $ (5,000) 10 Working capital reieased 11 Total cash flows (a) 12 Discount factor (14%) (b) 13 Present value of cash flows (a) x (b) S 10,000 $ 100,000 $ (160,000) S 40,000 S 40,000 $ 40,000 S 35,000 $ 150,000 1.000 0.877 0.769 0.675 0.592 $ 0.519 S (160,000) S 35,080 $ 30,760 $ 27,000 S 20,720 $ 7,850 31,410 14 Net present value (SUM B13:G13) 15 16 Note: The discount factors come from Exhibit 138-1 in Appendb 138.
Is the return on this investment proposal exactly 14%, more than 14%, or less than 14%? Explain.
The Net Present Value Method-An Extended Example
Transcribed Image Text:D.
Year
Now
3 Purchase of equipment
4 Investment in working capital
5 Sales
6 Cost of goods sold
7 Out-of-pocket costs for salaries, advertising, etc.
8 Overhaul of equipment
9 Salvage value of the equipment
$ (60,000)
S (100,000)
S 200,000 $ 200,000 $ 200,000 S 200,000 $ 200,000
$125,000) S(125,000) S(125,000) $(125,000) $(125,000)
$ 135,000) S (35,000) S (35,000) S (35,000) S (35,000)
$ (5,000)
10 Working capital reieased
11 Total cash flows (a)
12 Discount factor (14%) (b)
13 Present value of cash flows (a) x (b)
S 10,000
$ 100,000
$ (160,000) S 40,000 S 40,000 $ 40,000 S 35,000 $ 150,000
1.000
0.877
0.769
0.675
0.592 $
0.519
S (160,000) S 35,080 $ 30,760 $ 27,000 S 20,720 $ 7,850
31,410
14 Net present value (SUM B13:G13)
15
16 Note: The discount factors come from Exhibit 138-1 in Appendb 138.
Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.
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