The Excel worksheet form that appears below is to be used to recreate Example E and Exhibit 13-8. Download the workbook containing this form from Connect, where you will also receive instructions about how to use this worksheet form.

Exhibit 13 - 8: The Net Present Value Method-An Extended Example

You should proceed to the requirements below only after completing your worksheet. Note that you may get a slightly different net present value from that shown in the text due to the precision of the calculations.
Required:
1. Check your worksheet by changing the discount rate to 10%. The net present value should now be between $56,495 and $56,518-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. Explain why the net present value has increased as a result of reducing the discount rate from 14% to 10%.
2. The company is considering another project involving the purchase of new equipment. Change the data area of your worksheet to match the following:
Data
Example E
Cost of equipment needed . . . . . . . . . . . . . . . $120,000
Working capital needed . . . . . . . . . . . . . . . . . . $80,000
Overhaul of equipment in four years . . . . . . . . $40,000
Salvage value of the equipment in five years . . $20,000
Annual revenues and costs:
Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . $255,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . $160,000
Out-of-pocket operating costs . . . . . . . . . . . . . $50,000
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14%
a. What is the net present value of the project?
b. Experiment with changing the discount rate in one percent increments (e.g., 13%,
12%, 15%, etc.). At what interest rate does the net present value turn from negative to positive?
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.)?
d. Reset the discount rate to 14%. Suppose the salvage value is uncertain. How large would the salvage value have to be to result in a positive net present value?

Year Now (60,000) s (100,000) 4 3 Purchase of equipment 4 Investrment in working capital 5 5ales 6 Cost of goods sold 7 Out-of-pocket costs for salaries, advertising, etc. 8 Overhaul of equipment 9 Salvage value of the equipment 10 Working capital released 11 Total cash flows (a) 12 Discou nt factor (14%) (b) 13 Present value of cash flows (a) x(b 14 Net present value (SUM B13:G13) 15 16 Note: The discount factors come from Exhibit 138-1 in Appendix 138. 17 5 200,000 200,000 $ 200,00D 200,000 $ 200,000 (125,000) $(125,000)$(125,000)(125,000) S(125,000) $ (35,000) (35,000) 35,000) (35,000) S (35,000) $ (5,000) 10,000 S 100,000 $ (160,000) 40,00040,000 40,000 35,000 150,000 1.000 0.877 0.790.750.592 0.519 $ (160,000) 35,080 30,760 27,000 20,720 77850 31,410 8 1 Chapter 13: Applying Excel 2 3 Data 4 Example E 5 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 10 Sales revenues 560,000 100,000 S5,000 510.000 5200,000 $125,000 535,000 14% 11 Cost of goods solc 12 Out-of-pocket operating costs 13 Discount rate 14 15 Enter a formula into each of the cella marked with a? below 16 Exhibit 13-8 17 18 Years Now 19 Purchase of equipment 20 Investment in working capital 21 Sales 22 Cost of goods sold 23 Out-of-pocket operating costs 24 Overhaul of equipment 25 Salvage value of the equipment 26 Working capital released 27 Total cash fovs (a) 28 Discount factor (14%) (b) 29 Present value of cash fows (a) x 30 Net prasent value 32 "Use the formulas from Appendix 13B 33 Present value of S1 34 Present value of an annuity of 31 (111+n)l 35 where n is the number of years and r is the discount rate 36 [+4 , bi | Chapter 13 Form. Filed n Chapter 13 Form Chapter 13 1/1+r