March28

# March28 - Salvage 50,000 Purchase Price (500,000)...

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Internal Rate of Return Two ways to compute IRR (internal rate of return) A) Use solver, and solve for the rate of return needed to get a net pre Project A: Rate of Return Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Outflows (100,000) Cash Inflows 30,000 30,000 30,000 30,000 30,000 Net Cash Flow (100,000) 30,000 30,000 30,000 30,000 30,000 Discount Facto 1 1 1 1 1 1 PV of Cashflow (100,000) 30,000 30,000 30,000 30,000 30,000 Net Present Va 50,000 Project B: Rate of Return Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Outflows (100,000) Cash Inflows - 20,000 20,000 50,000 90,000 Net Cash Flow (100,000) - 20,000 20,000 50,000 90,000 Discount Facto 1 1 1 1 1 1 PV of Cashflow (100,000) - 20,000 20,000 50,000 90,000 Net Present Va 80,000 B) Use IRR formula on the undiscounted cash flows

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Old New Difference Future Life 5 5 0 Current salvage value 50,000 - 50,000 Purchase price - 500,000 (500,000) Future Salvage value 10,000 125,000 (115,000) Annual variable costs 350,000 350,000 - X X YR0 YR1 YR2 YR3 YR4 Net Capital Cost of Purchase

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Unformatted text preview: Salvage 50,000 Purchase Price (500,000) (450,000)- - - - PV factor at 15% 1 0.8696 0.7561 0.6575 0.5718 (450,000)- - - - Net Present Value (387,853) Therefore, the minimum net present value of savings on operating costs that result from equivalent to the cost of the new equipment. Assuming that any savings in variable operating costs are evenly spread over the 5 yea that totals \$387,853 at 15% over 5 years: Cost of Capital 15% Number of Periods 5 years Annuity Factor 3.35 PV of an annuity 387,853 PV of an annuity = Annual annuity * Annuity factor \$387,853 = X * 3.3522 X = \$387,853 / 3.3522 X = \$115,701 The savings in operating costs have to be 115,701 each year to justify the new equipm costs equal \$234,299 (\$350,000 - \$115,701) YR5 125,000 125,000 0.4972 62,147 m the new equipment must be \$387,853, ars, we need to calculate the annuity ent. That means the new annual variable...
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## This note was uploaded on 05/11/2011 for the course AFM 102 taught by Professor R.ducharme during the Spring '09 term at Waterloo.

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March28 - Salvage 50,000 Purchase Price (500,000)...

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