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# 000 63000 1 5 3352 8000 5 0497 pvofcash flows overhaul

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Unformatted text preview: 192. From the annuity table, the 4.192 factor is closest to the 10-year row at the 20% column. Therefore, the IRR is 20%. Diff: 2 Terms: NPV method, RRR, internal rate-ofreturn (IRR) method Objective: 3 AACSB: Analytical skills 110) Network Service Center is considerin g purchasin g a new computer network for \$82,000. It will require additional working capital of \$13,000. Its anticipated eight-year life will generate additional client revenue of \$33,000 annually with operating costs, excluding depreciation, of \$15,000. At the end of eight years, it will have a salvage value of \$9,500 and return \$5,000 in working capital. Taxes are not considered. Required: a. If the company has a required rate of return of 14%, what is the net present value of the proposed investment? b. What is the internal rate of return? Answer: a. Predicted Cash Flows Year(s) PV Factor \$(95,000) 0 1.000 18,000 1-8 4.639 14,500 8 0.351 PV of Cash Flows Initial investment Annual operations, net Salvage value, work cap Net present value b. Trial and error is necessary. You know it is below 14% because the answer to Part A was negative and, therefore, less than the discount rate. Therefore, let's try 12%. Initial investment Annual operations, net Salvage value, work cap Net present value The (almost) zero net present value indicates an internal rate of return of approximately 12%. Predicted Cash Flows Year(s) PV Factor \$(95,000) 0 1.000 18,000 1-8 4.968 14,500 8 0.404 PV of Cash Flows Diff: 3 Terms: NPV method, RRR, internal rate-ofreturn (IRR) method Objective: 3 AACSB: Analytical skills 111) EIF are as follows: Manufact uring Current Machine New Machine Company Purchase Price, New \$80,000 \$100,000 needs to Current book value 30,000 overhaul Overhaul needed now 40,000 its drill Annual cash operating costs 70,000 40,000 press or Current salvage value 20,000 buy a new Salvage value in five years 5,000 20,000 one. The facts have Required: been gathered, Which alternative is the most desirable with a curr...
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