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

This preview shows pages 1–3. Sign up to view the full content.

© 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 )

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
© 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.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern