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DATA: PIEDMONT'S EXPECTED RATE OF RETURN FOR EITHER PURCHASE = 14% PIEDMONT USES THE STRAIGHT-LINE METHOD OF DEPRECIATION (for annual depreciation = ((Cost of Asset - Residual Value of Option = Depreciable Amount) /Useful Life). Book Value at end of Useful Life = Cost of Asset - Accum. Depreciation for the 3 years of useful life for either server option. SERVER A: COST OF ASSET AT TIME OF PURCHASE = $45,000 Annual Net Cash Inflow = $25,000 per year Expected Residual Value (money expected to receive when selling server at end of the useful life) = $0 Useful Life = 3 years SERVER B: COST OF ASSET AT TIME OF PURCHASE = $45,000 Net Cash Flow Year 1 = $25,000 Net Cash Flow Year 2 = $15,000 Net Cash Flow Year 3 = $ 5,000 Expected Residual Value (money expected to receive when selling server at end of the useful life) = $5,000 - Useful Life = 3 years 1. Use the ATTACHED Capital Investment Analysis Excel Template to complete the full analysis for each of the 5 methods. 2. Based on the quantitative results from requirement 1, what server should Piedmont buy and why. 3. What other qualitative factors might be considered in a final decision made by management. A B D TIME VALUE OF MONEY NOT A PART OF THIS CALCULATION (Does not take into account when money is coming in. TH E F G H 2 ADD MORE ROWS/COLUMNS IF NECESSARY 3 CASH PAYBACK LOOK AT NET CASH FLOW EACH YEAR UNTIL YOU REACH THE INVESTMENT VALUE 4 PROPOSAL ASSUMPT 5 INVESTMENT: PAYBACK RVISV/TIV (COST OF PERIOD ANNUAL ACC. CASH FLOW PAYBACK PERIOD: YEAR WO 1 8 2. Last Cash Flow Period needs to add in RV @ end of 9 period due to assumed selling at this price. 3 10 TOTAL 11 12 13 14 15 16 117 18 119 20 21 22 23. PROPOSAL 24 INVESTMENT Union ROMANLLELONA atten CashBack Ace Acct RR NPM PVI IRR ANAL AMIR ILLA Ladet 2 1 EAA. . 27 $ % 9 3 Conditional Formats Cell Formatting Table Styles Styles Delete - Format Cell Sort Find & Filter Select Font KO Analyse Data A Alignment 5 Number Editing 3 K M N O P money is coming in. This calculation assumes it does not matter how long it takes to get the money.) R S T U V W X ASSUMPTIONS: AMOUNTS ARE BEST GUESS (BUDGETS), USEFUL LIFE, DEPRECIATION METHOD ARE ACCURATE. WHAT HAPPENS IF NOT? PAYBACK PERIOD MAY BE OBVIOUS IF THE YEAR'S ACCUM CASH FLOW INVESTMENT, IF NOT USE THE CALCULATKIN BELOW TO GET MONTHS (COST OF INVESTMENT - ACCUM CASH FLOW PRIOR TO GOING ABOVE COST)/ANNUAL CASH FLOW FOR NEXT YEAR WHERE ACCUM GOES OVER 12 MONTHS YEAR WOULD BE THE YEAR BEFORE ACCUM CASH FLOW GOES OVER THE COST OF INVESTMENT WHICH OPTIONS GIVES THE FASTEST PAYBACK PERIOD & WHY? PERIOD ANNUAL ACC. CASH FLOW 17 18 9 20 -1 2 23 PROPOSAL -4 INVESTMENT 5 RV/SV/TIV 6 PAYBACK PERIOD: 7 Last Cash Flow Period needs to add in RV @ end of 8 period due to assumed selling at this price. 9 TOTAL 0 1 2 3 4 5 6 2 3 EN NhN G TIME VALUE OF MONEY NOT A PART OF THIS CALCULATION (Does not take into account when money is coming in. This H K OPTION 1 ADD ROWS WHERE NECESSARY Ann. Net ANNUAL CASH FLOW Cash SAVINGS (EXPENSES) Flow Less: Dep. Income DESIRED RATE OF RETURN: 1 0 01 2 0 0 31 0 0 TOTAL 0 0 AVG. ANNUAL INCOME olololole ANNUAL SLN DEP Invest. Cost RV 3 =Dep. Amt U/L BANNUAL SLN DEP 5 ACCRUAL ACCT BRATE OF RETURN 9 Avg Op. Inc Investment 1 = ACCRUAL ACCT 2 RATE OF RETURN M N P R HIS CALCULATION (Does not take into account when money is coming in. This calculation assumes it does not matter how long it takes to get the money.) S SSARY me DESIRED RATE OF RETURN 0 0 0 0 0 WHICH OPTION IS BETTER & WHY? Acc Acct RR NPV DVI TRR ANAL DESIRED RATE OF RETURN Polololo 25 OPTION 2 ADD ROWS WHERE NECESSARY Ann, Net ANNUAL CASH FLOW Cash 26 SAVINGS/EXPENSES) Flow Less: Dep. Income 27 1 0 0 28 2 0 0 29 3 0 0 30 TOTAL 0 0 31 AVG ANNUAL INCOME 32 33 ANNUAL SLN DEP 34 Invest. Cost 35 -RV 36 Dep Art. 37 / U/L 38 = ANNUAL SLN DEP 39 40 ACCRUAL ACCT 41 RATE OF RETURN 42 43 / Investment 44 ACCRUAL ACCT 45 RATE OF RETURN 46 Avg. Op Inc AMA ILS AND THE NEXT 2 CALCULATIONS TAKE INTO ACCOUNT WHEN MONEY IS RECEIVED. THE SE CALCULATIONS ASSUMING THE SOONER YOU GET THE MONEY THE BETTER N 0 P g 2 NET PRESENT VALUE ADD MORE ROWS IF NEEDED 3 USE THE PV of 51 multipliers for this problem OPTION 1 6 DESIRED RATE PV TOTAL Use PV Multipliers for $1 of Annuity Table OR PV NPV Excel Spreadsheet OR Us Excel Function NPVO -INVESTMENT COST $ CASH FLOW MULTIPLER PV OF FUTURE CASH FLOWS IF CASH FLOWS FROM TEXTOOK APPENDO 9NPY Period Mulher PV of Cash Flow Par Pune 10 11 Annual Cash ice for 12 RV end of 13 TOTAL TOTAL PV OF ALL PERIOD 1. Does this 10 lavement 17 widgeted Cash Flows WOON GVES THE 1 live positive NPV? YIN 20 21 OPTION 2 22 DE RED RAL TV TOTAL 26 INVESTMENT COST Use PV Multipliers for $1 o Annuity Table ORIV_NIVEcel Spreadsheet of the cel Function - NPVU CASH FLOW MULTIPLER PV OF FUTURE CASHFLOWS CASH FLOWS FROM TEXTOOK APP Annual + Cash received for RV end of Un F G 3 TOTAL M N TOTAL PV OF ALL PERIOD Does this Investment with Budgeted Cash Flows give a positive NPV? Y/N OPTION 2 DESIRED RATE PV TOTAL INVESTMENT COST NPV Use PV Multipliers for $1 or Annuity Table OR PV_NPV Excel Spreadsheet OR Une Excel Function - PVO CASH FLOW MULTIPLER PV OF FUTURE CASH FLOWS IF CASH FLOWS FROM TOOK APPENCE Period Multipher PV of Cash Flow Per Period 1 2 Annual Cash received for RV and of UML 3 TOTAL TOTAL PV OF ALL PERIOD Does this Investment with Budgeted Cash Flows give a positive NPV? Y/N 20 R S S T WHICH OPTION GIVES THE BEST NPV & WHY? el Function =NPVO) H FLOWS FROM TEXTBOOK APPENDIX M ADD IF NECESSARY - PRESENT VALUE INDEX 3 PV OF CASH FLOWS/INVESTMENT N DESIRED RATE OF RETURN 5 OPTION 1: 6 PV OF INVESTMENT 7 / INVESTMENT COST 8 PVI 9 10 11 12 13 14 15 OPTION 2 16 PV OF INVESTMENT 17 INVESTMENT COST 18 = PVI 19 20 21 WHICH OPTION GIVES THE BIGGEST BANG FOR THE BUCK INVESTED THAT IS WHAT PVI IS REALLY TRYING TO TELL US AND WHY? INTERNAL RATE OF RETURN WHEN EQUAL NET CASH FLOWS ARE ASSUMED M N R OPTION 1 IRR must have at least 1 negative number investment Cost is always shown as a negative) This number is set up as a negative number since the IRR is making the assumption that this is how much cash was padut to get a INVEST CF 1 CF 2 CF 3 Net Cash Inflow Residual Value 7 when sold in period 3 G 9 CF 3 IRR Use the RR Excel action highlight cash fos) and click on ter IRR must have at least 1 negative number (Investment Contis always shown at ang number This number is set op aa a negative number since the IRR is making the son that the wicht was a CF 10 11 OPTION 1 12 INVEST 13 14 CF 2 CF 3 Net Cash Intlow + Residual Value 15 when sold in period 3 CH 3 16 IRR 17 10 19 20 WHICHORTON GIVES BEST IRR & WHY? Use the Excel function highlight cash and click on

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