Granular Sugar Company is considering buying a new fork lift truck that will improve warehousing efficiency. the cost is $100,000 and it will last two years producing additional cash inflows of $61,500 each year. Granular's cost of capital is 10%. What is the net present value, internal rate of return, percentage margin of safety on the cost and margin of safety on the additional cash inflow?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the future cash inflows to their present value using the cost of capital (10%).

NPV = -Cost + PV of Cash Inflows 
NPV = -$100,000 + $61,500 / (1+0.10)^1 + $61,500 / (1+0.10)^2 
NPV = $6,736

To calculate the IRR, we need to find the discount rate that makes the NPV equal to zero. We can do this using a financial calculator or Excel.

IRR = 14.97%

To calculate the percentage margin of safety on the cost and margin of safety on the additional cash inflow, we can use the following formulas:

Margin of Safety on the Cost = (IRR - Cost of Capital) / IRR 
Margin of Safety on the Cost = (0.1497 - 0.10) / 0.1497 
Margin of Safety on the Cost = 6.7%

Margin of Safety on the Additional Cash Inflow = (NPV / Cost) * 100% 
Margin of Safety on the Additional Cash Inflow = ($6,736 / $100,000) * 100% 
Margin of Safety on the Additional Cash Inflow = 6.7%

Therefore, the best choice is A with an NPV of $6,736, an IRR of 15%, a percentage margin of safety on the cost of 6.7%, and a margin of safety on the additional cash inflow of $3,881.

Granular Sugar Company Is Considering Buying a New Fork Lift