# NPV, Equivalent Annual Cash Flow Calculations

Consider the following projects:

Cash Flows, $

Project C0 C1 C2 C3 C4 C5

A -1,200 +1,200 0 0 0 0

B -2,400 +1,200 +1,200 +4,200 +1,200 +1,200

C -3,000 +1,200 +1,200 0 +1,200 +1,200

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a-1. If the opportunity cost of capital is 12%, what is the NPV for each project? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project NPV

A $

B $

C $

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b. Calculate the payback period for each project. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Project Payback Period

A year(s)

B year(s)

C year(s)

________________________________________

d. Calculate the discounted payback period for each project. (Enter 0 if the payback period cannot be calculated. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project Discounted

Payback Period

A year(s)

B year(s)

C year(s)

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You have the chance to participate in a project that produces the following cash flows:

Cash Flows, $

C0 C1 C2

+5,000 +4,000 -11,000

________________________________________

a. The internal rate of return is 13%. If the opportunity cost of capital is 10%, what is the NPV of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV $

Machines A and B are mutually exclusive and are expected to produce the following real cash flows:

Cash Flows ($ thousands)

Machine C0 C1 C2 C3

A -109 +119 +130

B -129 +119 +130 +142

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The real opportunity cost of capital is 8%. (Use PV table.)

a. Calculate the NPV of each machine. (Do not round intermediate calculations. Enter your answers in thousand rounded to the nearest whole number.)

Machine NPV

A $

B $

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b. Calculate the equivalent annual cash flow from each machine. (Do not round intermediate calculations. Round "PV Factor" to 3 decimal places. Enter your answers in thousand rounded to the nearest whole number.)

Machine Cash flow

A $

B $

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#### Solution Summary

This solution explains to calculate NPV and equivalent annual cash flow through excel.

Replacement Decision- Unequal Lives

Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins' cost of capital is 14%. Should the firm replace its old knitting machine and if so, which new machine should it use. Give supporting evidence.

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