FIN 401 Lecture Notes - Lecture 14: Net Present Value, Credit Risk, Eval

• School: Ryerson University
• Department: Finance
• Course: FIN 401
• Professor: Kristyn Scott

Document Summary

Replacement problem: old machine: initial cost = ,000, cca rate = 20%, purchased 5 years ago, salvage today = ,000, salvage in 5 years = ,000. New machine: initial cost = ,000, 5-year life, Salvage in 5 years = ,000, cost savings = ,000 per year after-tax, Formula: incremental cf= cf (new machine) cf (old machine) Npv(cid:523)replacement(cid:524) = )(cid:882) + pv(cid:523) ocf(cid:524) + pv(cid:523) sn(cid:524) + pv(cid:523) nwc(cid:524) +pv (cid:523) ccats(cid:524) )(cid:882) =-,000 +,000 = -(cid:883)(cid:882),(cid:882)(cid:882)(cid:882) pv(cid:523) ocf(cid:524) = pv(cid:523)n=5, Pv(cid:523) sn(cid:524) = (cid:523),(cid:882)(cid:882)(cid:882)- ,000)/1. 15 = -,000/1. 15 = -,314. Npv = -,000 + ,493 - ,314 + 0 + ,938 = ,117 r=10%, pmt=,000) = , 493. Evaluating projects with unequal life spans: when projects have different life spans, we can compare the projects" cost per year in pv terms (equivalent annual cost: eac). Calculating eac: 1) calculate project npv 2) solve pmt in pv function by setting pv= project npv from step 1.