Revenues Operating expenses Total 1500000 1260000 240000 10 Revenues Operating

Revenues operating expenses total 1500000 1260000

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Revenues Operating expenses Total $1,500,000 ($1,260,000) $ 240,000 10 Revenues Operating expenses Salvage Recovery of working capital Total $1,500,000 (1,260,000) 40,000 50,000 $ 330,000 2. Year Cash Flow Discount Factor Present Value 0 $(1,150,000) 1.000 $(1,150,000) 1 – 5 240,000 3.605 865,200 6 140,000 0.507 70,980 7 240,000 0.452 108,480 8 240,000 0.404 96,960 9 240,000 0.361 86,640 10 330,000 0.322 106,260 NPV $ 184,250 The product should be produced. 13-21. Lindsey Thompson, owner of Leshow Company, was approached by a local dealer in air conditioning units. The dealer proposed replacing
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Leshow’s old cooling system with a modern, more efficient system. The cost of the new system was quoted at $96,660, but it would save $20,000 per year in energy costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving $20,000 per year and having a more reliable unit, Lindsey requested an analysis of the project’s economic viability. All capital projects are required to earn at least the firm’s cost of capital, which is 10 percent. There are no income taxes. Required 1. Calculate the project’s internal rate of return. Should the company acquire the new cooling system? 2. Suppose that energy savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firm’s cost of capital. 3. Suppose that the life of the new system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. 4. Explain the implications of the answers from Requirements 1, 2, and 3.
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