At project termination end of year 3 since the estimated disposal value at the

# At project termination end of year 3 since the

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At project termination (end of year 3): since the estimated disposal value at the end of the three-year project life is not relevant to the decision. 2. Estimated NPV of asset-replacement proposal: PV factor Net investment outlay 1.000 After-tax cash inflow 0.909 After-tax cash inflow 0.826

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After-tax cash inflow 0.751 At a 10% discount rate, the project is acceptable (i.e., NPV Using the built-in NPV function in Excel yields the following estimat 3. Sensitivity analysis: breakeven WACC captial? Use Goal-Seek optio Step One: Set-up the Problem Note: the WACC is contained in cell J29 Note: cell K80 contains the formula "=J73+NPV(J29,J74:J76)" Step Two:Run Goal Seek Step Three: Solution Check on above result: WACC = 14.3597% Net investment outlay 1.000 After-tax cash inflow 0.874 After-tax cash inflow 0.765 After-tax cash inflow 0.669 PV factor 1
PV factor = 1/(1+0.143597)^Year, where Ye 1 calculated according to the following formula:

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\$300,000 \$0 3 \$0 \$0 \$600,000 \$0 3 \$280,000 40% 10.0000% the following three points related to this asset-replacement .e., years 1, 2, and 3); and (3) project disposal (termination, end replace asset A with asset B? (Show calculations.) he company indifferent between keeping or replacing asset A?
\$300,000 \$0 (\$300,000) (\$120,000) \$600,000 (\$120,000) \$480,000 B \$200,000 \$80,000 \$40,000 \$280,000 \$112,000 t \$168,000 \$208,000 e is the same for each asset (viz., \$0), terminal value Year CF PV CF 0 (\$480,000) (\$480,000) 1 \$208,000 \$189,072 2 \$208,000 \$171,808

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3 \$208,000 \$156,208 NPV = \$37,088 > 0). ted NPV = \$37,265 on in Excel. Year CF PV CF 0 (\$480,000) (\$480,000) 1 \$208,000 \$181,882 2 \$208,000 \$159,044 3 \$208,000 \$139,073 NPV = (\$0)
ear = 0, …, 3

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Exercise 12-43: Cash Flow Analysis; NPV; Spreadsheet Analysis Background Lou Lewis, president of the Lewisville Company, has asked you to give him an an Lewisville Company is currently leasing the warehouse to another company on a estimated sales value is \$200,000. A commercial realtor believes that the price is originally cost \$60,000 and is being depreciated at \$1,500 annually. Its current ne seriously considering converting the warehouse into a factory outlet for furniture. because the major attraction will be rock-bottom prices. The remodeling cost will (net of current liabilities) needed to open, and sustain the factory outlet would be operations terminate. Lou is fairly certain that the warehouse will be condemned in 10 years, to make room for a ne \$200,000 from the condemnation. Estimated annual operating data, exclusive of \$500,000; non-recurring sales-promotion costs at the beginning of year 1 are exp the end of year 5 are estimated as \$50,000. The minimum annual rate of return d Note: do not use the PV factors from Appendix C. Rather, calculate those fa Problem Information Leasing income per month \$5,000 Warehouse’s current sales value (estimated) \$200,000 Building--original cost \$60,000 Annual Depreciation Expense \$1,500 Current net book value (NBV) of building \$7,500 Remodeling cost \$100,000 Estimated salvage value, remodeling cost \$0 Years for depreciation--remodeling cost 5 Incremental Invest in Net Working Capital \$600,000 Recovery of Investment in Net W/C (Year 5) \$600,000 Warehouse will be condemned (in years) 10 Estimated receipts from condemnation \$200,000 Sales (cash) \$900,000 Operating expenses (cash) \$500,000 Nonrecurring sales-promotion costs \$100,000 Nonrecurring termination costs declining-balance method. ( NOTE: use the VDB function in Excel to calculate PV factor i = 1/(1.14) i
(at the end of year 5) \$50,000

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