NPV of proposed investment for the Tower Division of Thunder Corporation

1. On January 2, 2010, Thunder Corporation's board of directors considered the acquisition of a new line of equipment for its new Tower Division.
Details surrounding the proposed investment are shown below, opportunity cost is 12.5% compounded continuously.
Tower's board has asked you to evaluate NPV, IRR and EAC on the project. In addition, due to the current anti-business climate in Washington,
the board has also asked you to evaluate the impact on each of the above should corporate tax rates climb to 45% and the accelerated depreciation
deduction be eliminated. Finally, the board asked you to evaluate the impact of receivables on each measure.
Note: equipment is disposed of at the end of Year 8 for $15,000, which is $7,000 above its salvage value.

Period 0 1 2 3 4 5 6 7 8
Capital Investment/salvage 50,000 15,000
Accumulated Depreciation* 14,286 24,490 31,778 36,985 38,656 40,328 42,000
Book value @ Year End 35,714 25,510 18,222 13,015 11,344 9,672 8,000
Accounts Receivable - 1,550 2,700 3,550 4,150 2,750 1,975 1,050 -
Inventory - 4,900 12,900 16,500 19,000 12,500 7,500 2,350 -
Accounts Payable - 1,050 1,700 3,575 2,900 1,200 850 475 -
Change in Net Working Capital

Sales - 25,275 38,500 59,000 73,750 51,000 43,500 22,000
Cost of Goods Sold 14,407 17,325 26,550 33,188 25,500 23,925 13,200
Other Costs 3,500 2,500 2,750 3,000 3,500 2,900 2,400 1,675
Depreciation 14,286 10,204 7,289 5,206 1,672 1,672 1,671.80
Total costs 31,192 30,279 36,839 41,894 30,072 27,997 16,547
EBIT (3,500) (5,917) 8,221 22,161 31,856 20,928 15,503 5,453 7,000
Tax @ 40% (1,400) (2,367) 3,288 8,865 12,743 8,371 6,201 2,181 2,800
After-tax Profit (2,100) (3,550) 4,933 13,297 19,114 12,557 9,302 3,272 4,200

Capital Disposal

Net Cash Flow (52,100.00)
PV Cash flows -
NPV (52,100)
#NUM!

1 + Annual rate
Annual rate

IRR #NUM! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
EAC #VALUE!
PVANF #VALUE! #VALUE!

EAC Proof #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
#VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!

a. Thunder's board has asked for your help in determing the following:
1) NPV
2) IRR
3) EAC

b. While the Tower Division seems to offer a promising return, the board expresses some real concern about the reliability of the equipment since it represents untested technology.
The financial analysis above is based on a eight year life and you believe that the probabilities of failure/obsolecence at a given point follow an Exponential Distribution.
You decide to adjust the free cash flows at the end of each year for the probability of failure/obsolescence prior to the end of that year by multiplying the free cash flows
by the probability that the equipment is still commercially viable.
1) Adjusted NPV #VALUE!
2) Adjusted IRR #VALUE!
3) Adjusted cash flows: Yrs: (52,100.00) #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
#VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
4) Is the project viable?

Double Declining Balance Depreciation Schedule MTBF 8
λ 0.125
Year BV Rate Depr
0 50,000.00 0 0 1
1 35,714.29 0.285714286 14,285.71 1 0.117503097 0.882496903
2 25,510.20 0.285714286 10,204.08 2 #VALUE!
3 18,221.57 0.285714286 7,288.63 3 #VALUE!
4 13,015.41 0.285714286 5,206.16 4 #VALUE!
5 11,343.61 1,671.80 5 #VALUE!
6 1,671.80 6 #VALUE!
7 8,000.00 1,671.80 7 #VALUE!
42,000.00 8 #VALUE!