Birkenstock is considering an investment in a nylon-knitting machine. The machin

Question

Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $25,000, has a 5-year life, and has no residual value at the end of the 5 years. The company's cost of capital is 12%. Known with less certainty are the actual after-tax cash inflows for each of the 5 years. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV given each scenario.

Expected Cash inflows

Year Pessimistic Most likely Optimistic
1 $5,000 8,000 10,500
2 6,000 9,000 12,000
3 7,500 10,500 14,500
4 6,500 9,500 11,500
5 4,500 6,500 7,500

Explanation / Answer

NPV = NPV(Rate, CF1...Cf5) + CF0 Dep using SLN = $25000/5 = $5000 pa Net CF = Cash Inflow + Dep written back = Cash IF + 5000 So Just add 5000 to each of Cash Inflows to get Net CF Pessimistic NPV = NPV(12%,10000,11000,12500,11500,9500) - 25000 = $14,294 Most likely NPV = NPV(12%,13000,15000,15500,14500,11500)- 25000= $25,338 Optimistic NPV=NPV(12%,15500,17000,19500,16500,12500)-25000 = $33,850

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