QUESTION: With the help of the example below, create your own cash inflow project exercise for walgreens boots alliance and give its solution using the same method given in the example.

The Example:

The management of Fine Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $6,000 and will increase annual cash inflow by $2,200. The useful life of the equipment is 6 years. After 6 years it will have no salvage value. The management wants a 20% return on all investments.

Required:

1. Compute net present value (NPV) of this investment project.
2. Should the equipment be purchased according to NPV analysis?

Solution:

(1) Computation of net present value:

*Value from present value of an annuity of $1 in arrears table.

(2) Purchase decision:

Yes, the equipment should be purchased because the net present value is positive ($1,317). Having a positive net present value means the project promises a rate of return that is higher than the minimum rate of return required by management (20% in the above example).

In the above example, the minimum required rate of return is 20%. It means if the equipment is not purchased and the money is invested elsewhere, the company would be able to earn 20% return on its investment. The minimum required rate of return (20% in our example) is used to discount the cash inflow to its present value and is, therefore, also known as discount rate.

Investments in assets are usually made with the intention to generate revenue or reduce costs in future. The reduction in cost is considered equivalent to increase in revenues and should, therefore, be treated as cash inflow in capital budgeting computations.