ACG 2071 Lecture Notes - Lecture 15: Net Present Value, Discounted Cash Flow, Discount Window
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Capital Budgeting | |||||||||||
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years: | |||||||||||
Year | Net Cash Outflows | Net Cash Inflows | |||||||||
Amount invested | |||||||||||
0 | ($100,000) | ||||||||||
1 | 25,000 | ||||||||||
2 | 29,000 | ||||||||||
3 | 26,000 | ||||||||||
4 | 28,000 | ||||||||||
5 | 35,000 | ||||||||||
Requirements | |||||||||||
1. Compute the accounting rate of return. | |||||||||||
2. Compute the net present value of the investment using Excel's PV function. | |||||||||||
3. Compute the net present value of the investment using Excel's NPV function. | |||||||||||
4. Compute the profitability index, rounded to two decimal places. | |||||||||||
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round. | |||||||||||
Excel Skills | |||||||||||
1. Function PV | |||||||||||
2. Function NPV | |||||||||||
3. Function IRR | |||||||||||
Evaluate Glacier Creek Textiles' new manufacturing equipment. | ||||||
Data | ||||||
Annual discount Rate | 0.12 | |||||
Cash Flow Year 0 (Cost) | (100,000) | |||||
Cash Flow Year 1 | 25,000 | |||||
Cash Flow Year 2 | 29,000 | |||||
Cash Flow Year 3 | 26,000 | |||||
Cash Flow Year 4 | 28,000 | |||||
Cash Flow Year 5 | 35,000 | |||||
Useful Life in years | 5 | |||||
Residual value | 0 | |||||
Requirement 1 | Compute the Accounting Rate of Return | |||||
Average annual operating income | Average amount invested | Accounting Rate of Return - ARR | ||||
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx | xxxxxxxxxxxxxx | xxxxxxxxxxxxxxxxx | ||||
Requirement 2 | Compute the net present value of the investment using Excel's PV function. | |||||
Period | Cash Flows | |||||
1 | (22,321) | Note: The first period is shown as an example. | ||||
2 | xxxxxxxx | |||||
3 | xxxxxxxx | |||||
4 | xxxxxxxx | |||||
5 | xxxxxxxx | |||||
Present value of net cash flows | xxxxxxxx | Note: PV calculates the present value as a negative amount. | ||||
Cost of Asset | xxxxxxxx | |||||
Net Present Value | xxxxxxxx | |||||
Requirement 3 | Compute the net present value of the investment using Excel's NPV function | |||||
Present value of net cash flows | xxxxxxxxxx | |||||
Cost of asset | xxxxxxxxxx | |||||
Net Present Value | xxxxxxxxxx | |||||
Requirement 4 | Compute the profitability index, rounded to two decimal places. | |||||
Profitability index | xxxxxxxxxx | |||||
Requirement 5 | Compute the internal rate of return of the investment using Excel's IRR function. | |||||
Display to two decimal places, but do not round. | ||||||
IRR | xxxxxxxxx | Note: IRR requires a negative amount for the investment. |
Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!
APPLY THE CONCEPTS: Net present value
Project A
This project requires an initial investment of $194,400. Theproject will have a life of 4 years. Annual revenues associatedwith the project will be $75,000 and expenses associated with theproject will be $15,000 for an annual net cash flow of $.
Note: Enter cash flows as positive numbers.
Cash Flows | ||
Year 0 | -$194,400 | |
Year 1 | ||
Year 2 | ||
Year 3 | ||
Year 4 |
Project B
This project requires an initial investment of $220,155. Theproject will have a life of 4 years. Annual revenues associatedwith the project will be $80,000, and expenses associated with theproject will be $15,000, for an annual net cash flow of $.
Cash Flows | ||
Year 0 | -$220,155 | |
Year 1 | ||
Year 2 | ||
Year 3 | ||
Year 4 |
The cost of capital for the company is 8%.
Present Value Tables
Present Value of $1 (a single sum) at Compound Interest.
Present Value of an Annuity of $1 at Compound Interest.
Use the minus sign to indicate a negative NPV. If an amount iszero, enter"0".
Project A NPV Analysis | |||||||||
Year | Cash Flow | Discount Factor | Present Value | ||||||
0 | $194,400 | 1.000 | $194,400 | ||||||
1â4 | 60,000 | select3.3120.7353.037Correct 11 of Item 4 | |||||||
NPV | $ |
Project B NPV Analysis | |||||||||
Year | Cash Flow | Discount Factor | Present Value | ||||||
0 | $220,155 | 1.000 | $220,155 | ||||||
1â4 | 65,000 | select3.3120.7353.037Correct 14 of Item 4 | |||||||
NPV | $ |
Based upon net present value, which project has the morefavorable profit prospects?
selectProject AProject BEither projectCorrect 17 of Item 4
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APPLY THE CONCEPTS: Internal rate of return
Calculate the internal rate of return for Project A and ProjectB (defined previously). Enter the IRR with the percent sign (i.e.4%).
Project A: IRR Analysis
With an initial investment of $194,400 and annual cash flows of$, the internal rate of return for Project A is .
Project B: IRR Analysis
With an intial investment of $220,155 and annual cash flows of$, the internal rate of return for Project B is .
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