CFO Phillipa Dodhia sent a memo to the Vice President of Acquisitions for Van Pelt Industries, Augustus Rodin, describing the performance criteria for a new machine needed by the manufacturing division.

Enter the appropriate amounts in the associated cells below. Round to the nearest whole number. Indicate negative numbers by using a leading minus (-) sign. Select from the option list provided whether the CFO's requirements will be satisfied for each scenario below. Each choice may be used once, more than once, or not at all.

QuestionAnswer 1. Rodin identified suitable equipment costing $2,000,000. What is the NPV of the equipment acquisition? 2. Rodin identified suitable equipment costing $2,000,000. Does it meet the CFO's requirements? 3. If CFO Dodhia changes the required rate of return to 12%, what is the NPV of the purchase? 4. If CFO Dodhia changes the required rate of return to 12%, will the purchase satisfy her requirements?

Email from CFO

Date: February 24, 20X7

To: Augustus Rodin, VP of Acquisitions

From: Phillipa Dodhia, CFO

Subject: Equipment Acquisition

Dear Augie,

We have completed the analysis you requested of the minimum performance criteria for the new machine requested by the manufacturing division. The following are our results:

Minimum annual revenue from machine operation$1,250,000Maximum operating cost (before depreciation) as a percentage of machine revenue50%Tax rate40%Useful life (for straight-line depreciation)5 years the required rate of return10%Sale proceeds at end of Year 4$500,000

Sincerely,

Phil

Present value tables

Present Value Tables

PeriodsPV of $1 at 10%PV of $1 at 12%10.9090.89320.8260.79730.7510.71240.6830.63650.6210.567

Hint: You are able to complete this simulation with your time value of money formulas (aka the tables are not necessary). I will take into consideration answers that are close due to rounding errors.

Hint: The equipment has no salvage value and is depreciated for an estimated 5 years, even though it is sold at the end of the fourth year. Note the cash flows also stop at the end of the fourth year.

Hint: The disinvestment amount is $460,000 ($500,000 sales price – ($100,000 gain * .4 tax))