Chapter 12: Applying Excel Data Example E Cost of equipment needed Working capital needed Overhaul of equipment in four years Salvage value of the equipment in five years Annual revenues and costs: Sales revenues Cost of goods sold Out-of-pocket operating costs Discount rate $110,000 $30,000 $10,000 $30,000 $360,000 $275,000 $55,000 17% Enter a formula into each of the cells marked with a ? below Exhibit 12-8 Years 3 Now 1 2 4 01 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Purchase of equipment Investment in working capital Sales Cost of goods sold Out-of-pocket operating costs Overhaul of equipment Salvage value of the equipment Working capital released Total cash flows (a) Discount factor (14%) (b) Present value of cash flows (a) x (b) Net present value ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? *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 Required information Chapter 12: Applying Excel Step 1: Download the Applying Excel form located on the left-hand side, under files. Step 2: Then enter formulas in all cells that contain question marks. For example, in cell C21 enter the formula "= B10". Important Note: The present value factors could be computed using the built-in Excel function PV, but we recommend using the formulas in Appendix 13B. Step 3: Check your worksheet by changing the discount rate to 10%. The net present value should now be between $56,400 and $56,535 (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. If you did not use formulas to calculate the Discount Factors, be sure that those values are updated appropriately using the Appendix 13B formulas that are also noted at the bottom of the spreadsheet instead of using the Discount Factor tables. Step 4: Proceed to the requirements below only after completing your worksheet as it will be used to answer the following questions. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Chapter 12: Applying Excel: Exercise Chapter 12: Applying Excel: Exercise 2. The company is considering a project involving the purchase of new equipment. Change the data area of your worksheet to match the following: Use Exhibit 12B-1 and Exhibit 12B-2. (Use appropriate factor(s) from the tables provided.) A B 1 Chapter 12: Applying Excel 2 3 Data 4. $ 110,000 $ Example E Cost of equipment needed 6 Working capital needed 7 Overhaul of equipment in four years 8 Salvage value of the equipment in five years 9 Annual revenues and costs: $ 30,000 10,000 30,000 $ 10 Sales revenues $ 11 $ Cost of goods sold Out-of-pocket operating costs 360,000 275,000 55,000 12 $ "? Discount rate 17% a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Round your present value factor to 3 decimals and round all other intermediate calculations to nearest whole dollar.) Net present value 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.)? The internal rate of return is between % and % d. Reset the discount rate to 17%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value? Minimum salvage value required to generate a positive net present value