Perform a financial analysis Available Data Amount Cost of Equipment (Zeroresidu
ID: 2433497 • Letter: P
Question
Perform a financial analysis Available Data Amount Cost of Equipment (Zeroresidual Value) 800,000 Cost of ink and papersupplies(purchase immediately) 100,000 Annual cash Flow Saving forWall Décor 175,000 Annual Addition Store Cashflow from increased Sales 100,000 Sale of ink and papersupplies at end of 5 years 50,000 Expected life ofequipment 5 years Cost of capital 12% 1 Calculate the net present value using the numbers provided.Assume that annual cash flows occur at the end of the year 2. Do a sensitivity analysis assuming all costs are 10% higherthan expected and that all inflows are 10% less thanexpected. 3 Identify possible flaws in the numbers or assumptions used inthe analysis, and identify the risk(s) associated with purchasingthe equipment. Perform a financial analysis Available Data Amount Cost of Equipment (Zeroresidual Value) 800,000 Cost of ink and papersupplies(purchase immediately) 100,000 Annual cash Flow Saving forWall Décor 175,000 Annual Addition Store Cashflow from increased Sales 100,000 Sale of ink and papersupplies at end of 5 years 50,000 Expected life ofequipment 5 years Cost of capital 12% 1 Calculate the net present value using the numbers provided.Assume that annual cash flows occur at the end of the year Available Data Amount Cost of Equipment (Zeroresidual Value) 800,000 Cost of ink and papersupplies(purchase immediately) 100,000 Annual cash Flow Saving forWall Décor 175,000 Annual Addition Store Cashflow from increased Sales 100,000 Sale of ink and papersupplies at end of 5 years 50,000 Expected life ofequipment 5 years Cost of capital 12% 1 Calculate the net present value using the numbers provided.Assume that annual cash flows occur at the end of the year Calculate the net present value using the numbers provided.Assume that annual cash flows occur at the end of the year 2. Do a sensitivity analysis assuming all costs are 10% higherthan expected and that all inflows are 10% less thanexpected. 3 Identify possible flaws in the numbers or assumptions used inthe analysis, and identify the risk(s) associated with purchasingthe equipment. Identify possible flaws in the numbers or assumptions used inthe analysis, and identify the risk(s) associated with purchasingthe equipment. Available Data Amount Cost of Equipment (Zeroresidual Value) 800,000 Cost of ink and papersupplies(purchase immediately) 100,000 Annual cash Flow Saving forWall Décor 175,000 Annual Addition Store Cashflow from increased Sales 100,000 Sale of ink and papersupplies at end of 5 years 50,000 Expected life ofequipment 5 years Cost of capital 12%Explanation / Answer
Discount rate k = 12% Cash OutFlow at start = 800,000 + 100,000 = ($900,000) Life of eqpt is 5 yrs with zero salvage value. So annualDepreciation = 800000/5 = $160,000 Salvage value of Ink & Paper at end of 5 yrs is $50,000 Annual Cash Inflow:Annual cash Flow Saving forWall Décor : $175,000 Annual Addn Store Cash flow from inc Sales: $100,000 ------------------------------------------------------------------- Total Revenue : $275,000 Less : AnnualDep -$160,000 ------------------------------------------------------------------- Profit: $115,000 Add back: Depreciation $160,000 -------------------------------------------------------------------- cash Flow: $275,000 -------------------------------------------------------------------- So for 4 yrs cash flow will be $275,000. However in 5th Year, CFwill be 275000+50000 (Sale of Ink & Paper) = $325,000. So NPV = CF0 + CF1/(1+K)^1 + CF2/(1+K)^2 + ........+CF5/(1+k)^5 ie NPV = -900,000 + 275000 (1/(1+0.12) + 1/(1+0.12)^2+ 1/(1+0.12)^3+ 1/(1+0.12)^4) + 325000/(1+0.12)^5 ie NPV = -900,000 + 275000(0.8929 + 0.7972 + 0.7118 + 0.6355) +325000*0.5674 ie NPV = -900,000 + 275,000*3.0373 + 325,000*0.5674 ie NPV = $119,676.07 So Net Present value is $119,676.07 B: All costs are 10% higher. So Cash Outflow = 1.10 * -900,000 =-$990,000 Annual Depreciation will be 1.10*800,000/5 = 176,000 Inflows are 10% Less. So Sales from Ink & paper at end of 5 yrs= 0.90*50,000 = $45,000 Annual Cash Inflow:Annual cash Flow Saving forWall Décor : $175,000 *0.9 =157,500 Annual Addn Store Cash flow from inc Sales: $100,000*0.9= 90,000 ----------------------------------------------------------------------------------- Total Revenue : $247,500 Less : AnnualDep -$176,000 ------------------------------------------------------------------- Profit: $71,500 Add back: Depreciation $176,000 -------------------------------------------------------------------- cash Flow: $247,500 -------------------------------------------------------------------- Cash flow in 5th year will be 247500+45000 = 292500 So NPV = CF0 + CF1/(1+K)^1 + CF2/(1+K)^2 + ........+CF5/(1+k)^5 ie NPV = -990,000 + 247500 (1/(1+0.12) + 1/(1+0.12)^2+ 1/(1+0.12)^3+ 1/(1+0.12)^4) + 292500/(1+0.12)^5 ie NPV = -990,000 + 247500(0.8929 + 0.7972 + 0.7118 + 0.6355) +292500*0.5674 ie NPV = -990,000 + 247,500*3.0373 + 292,500*0.5674 ie NPV = - $72,303.75 So Net Present value is ($72,303.75) Purchase of consumanbles like Ink & paper should be doneperoidically as per the reqts. In the given case, $100,000 isblocked in Ink & paper inventory & almost 50% of the Valueis recovered at end of 5 yrs = $50,000. Conservatively this $50,000invested over 5 yrs at 12% would have yielded $88,117. Thus anopportunity cost loss was $88117-50000=38117 and blockage of wrkingcapital of $50000.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.