Solve:

Basic Net Present Value Analysis

Jonathan Butler, process engineer, knows that the acceptance of a new process design will depend on its economic feasibility. The new process is designed to improve environmental performance. On the negative side, the process design requires new equipment and an infusion of working capital. The equipment will cost $$1,100,000,$ and its cash operating expenses will total $$260,000$ per year. The equipment will last for $7$ years but will need a major overhaul costing $$110,000$ at the end of the fifth year. At the end of $7$ years, the equipment will be sold for $$96,000.$ An increase in working capital totaling $$130,000$ will also be needed at the beginning. This will be recovered at the end of the $7$ years.

On the positive side, Jonathan estimates that the new process will save $$350,000$ per year in environmental costs $($fines and cleanup costs avoided$).$ The cost of capital is $10\%.$

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.Required:

Two present value tables are provided: Present Value of a Single Amount and Present Value of an Annuity. Use them as directed in the problem requirements.

Prepare a schedule of cash flows for the proposed project. $($Assume that there are no income taxes.$)$ If an amount is negative or an outflow, first enter a minus sign $(-).$

Schedule of Cash Flows

The NPV of the project is $ X $.$

$2($b$)$ Should the new process design be accepted?