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237 C S S A D 560

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237 C S S A D 560
Using a format similar to the spreadsheets in this chapter, develop a spreadsheet that summarizes this project’s cash flow, assuming a four-year useful life after the project is developed. Compute the present value of the cash flows, using an interest rate of 9%. What is the NPV for this project? What is the ROI for this project? What is the break-even point? Should this project be accepted by the approval committee?

SOLUTION

As the numbers indicate, this would not be an economically feasible project for a number of reasons. It would take more than the projected four year life span to breakeven on the initial investment, the return on investment is a very low number (-1), and the net present value is currently projected as a number less than zero.

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6

Sales
30,000
33000
36300
39930
43923
48315.3

savings
15000
15000
15000
15000
15000
15000

Total cash

PV
45000

41284.4
48000

40400.6
51300

39613.8
54930

38916.04
58923
63315.3

PV = 45000 = 45000 (1+ 0.09) 1.09 = 41284.4

PV2 = 48000 = 48000 = 40400.6 (1+0.09)2 1.1881

PV3= 51300 = 51300 = 39613.8 (1.09)3 1.2950

PV4 = 54930 = 54930 = 38916.046 (1.09)4 1.4115

Now calculate NPV:

Annual operating cost = 995 + 525 + 3300 = $4820

Development cost = 18700 + 1500 + 7500 + 6650 = $34350

Total Cost = $39170

Total initial investment= sales in first year+ inventory savings+ total cost = 30000 + 15000 + 39170 = $ 84170

NPV = -84170 + 45000 + 48000 + 51300 + 54930 1 + 0.09 (1 + 0.09)2 (1.09)3 (1.09)4

= -84170 + 41284.4 + 40400.6 + 39613.8 + 38916.046

NPV = 76044.846

Gain from investment = initial investment – cost = $45000

45000 - 39170
=
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