Operations Management

We are going calculate the NPV with the data we have. Before we start – 1.      On year 0 of the project we are going to spend $105000 for the equipment and it is capital out flow that would cause increase in long term liability and increase in long term assets, we can use a liner depreciation too which will be $21000 starting year 1, in the project Depreciation is an accounting trick which allows a business to write off the value of an long term asset over a period of time, but this is considered as a non-cash transaction (Investopedia, n.d.). 2.      Revenue on year 1 = $25000, years 2 – 4 = $27000 and on 5 th year $23000 3.      Cash outflow for the project on year 1 =$13000 , years 2 – 4 = $12000 and on 5 th year $10000 4.      There is no salvage value for the equipment after 5 years 5.      And the discount rate we will use is 6%, considering that the 3% bank borrowing rate is included with any inflation or other factors. Considering all the

 Before we start the NPV calculation, here are the facts we are going to use – ·       The cost to install the required equipment will be $75,000, this is the outflow on year 0 ·       Per my business partner, the firm will receive $15,000 annually for 7 years. ·       I think cash inflows will be of $14,000 in years 1-2, then inflows of $15,000 from years 3-4, and then inflows of$17,000 for years 5-7. ·       In 7 years, the equipment will stop working and can be sold for its parts for about $5,000. ·       The Capital cost or Discount rate: 6%  Rate 6%   Approach 1 ( Partner’s Plan) Approach 2 Year Cash Flow NPV Cash Flow NPV 0 ($75,000) -$75,000.00 -$75,000.00 -$75,000.00 1 $15,000 $14,150.94 $14,000.00 $13,207.55 2 $15,000 $