case4 - CASE 4 1 Present value of future cash flows Cost of...

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© 2008 For Instructor Use Only Case 4-1 CASE 4 1. Present value of future cash flows: Cost of equipment (zero residual value) Cost of ink and paper supplies (purchased immediately) Annual cash flow savings for Wall Décor ($175,000 X 3.60478)* Annual additional store cash flow from increased sales ($100,000 X 3.60478) Sale of ink and paper supplies at end of 5 years ($50,000 X 0.56743)** Net present value ($800,000) (100,000) ( 630,837 ) ( 360,478 ) ( 28,372 ) ( $119,687 ) * *Present value of an annuity for 5 years at 12% **Present value of 1 for 5 years at 12% The analysis shows that if Mr. Burns approves the purchase of equip- ment, the net present value of the project is $119,687. This suggests that the project should be undertaken. 2. Computation of revised amounts: Original Amounts Revised Amounts Cost of equipment (zero residual value) Cost of ink and paper supplies Annual cash flow savings from Wall Décor Annual additional store cash inflow from increased sales Sale of ink and paper supplies at end of 5 years ($800,000) (100,000) ( 175,000 ) ( 100,000 ) ( 50,000 ) ($880,000) (110,000) ( 157,500 ) ( 90,000 ) ( 45,000 )
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© 2008 For Instructor Use Only Case 4-2 CASE 4 (Continued) Present value of future cash flows, revised amounts: Cost of equipment Cost of ink and paper supplies (purchased immediately) Annual cash flow savings for Wall Décor ($157,500 X 3.60478) Annual additional store cash flow from sales ($90,000 X 3.60478) Sale of ink and paper supplies at end of 5 years ($45,000 X 0.56743) Net present value ($880,000) (110,000) ( 567,753 ) ( 324,430 ) ( 25,534 ) ($ 72,283) The analysis shows that if Mr. Burns approves the purchase of equipment, the net present value of the project is a negative $72,283.
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