A D E 1 2 CAPBUD Capital Budgeting 4 Data Section 6. 7 Cost of investment (initial outlay) 8 Estimated life of investment 9 Estimated salvage value 10 Estimated annual net cash inflow 11 Required rate of retum $500,000 10 years $25,000 $110,000 20.00% 12 Answer Section 13 14 15 Payback period 16 Accounting (average) rate of retum 17 Net present value 18 Internal rate of return FORMULA1 years FORMULA2 FORMULA3 FORMULA4 19 20 21 22 23 Scratch Pad 24 Cash flow table needed for 25 NPV & IRR calculations 26 NPV IRR 27 Annual Salvage Combined 28 Year Cash Flow Value Flows 29 30 -500000 110000 110000 31 2 110000 110000 110000 110000 32 3 110000 33 4 110000 34 110000 110000 35 110000 110000 36 110000 110000 37 8 110000 110000 38 9. 110000 110000 39 10 110000 25000 135000
4. Middleton Classics would like to test the sensitivity of the estimates used for the input data to compute the
a. What is the minimum cost of the investment (to the nearest $100) needed for the owner to accept it?
b. Reset cost to $500,000. What is the minimum salvage value (to the nearest $100) needed for the owner to accept it?
c.Reset salvage value to $25,000. What is the minimum annual cash flow (to the nearest $100) needed for the owner to accept it?
How sensitive to changes in the input data is the decision to accept or reject this investment? Do you have to change the estimates a lot or just a little to make the investment acceptable? Comment on the results of each of these analyses.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 5 images
