Problem No 29

Recent technology has made possible a computerized vending machine that can grind
coffee beans and brew fresh coffee on demand. The computer also makes possible
such complicated functions as changing $5 and $10 bills and tracking the age of an item
and then moving the oldest stock to the front of the line, thus cutting down on spoilage.
With a price tag for each unit, Easy Snack has estimated the cash flows in millions of
dollars over the product's six-year useful life, including the initial investment, as follows:

YEARS 0 1 2 3 4 5 6
CASHFLOW -20 8 17 19 18 10 3
(in rupees)

Solution:

CASH FLOW DIAGRAM:

STEP 1: The syntax for finding the present worth, if the future worth is given in Excel
software is

=PV (i%,n,,-fv).

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where

i is the interest rate,

n is the number of years and

fv is the future worth.

STEP 2: The syntax for finding the present worth, if the future worth is given in Excel
software is

=PV(i%,n,,-fv).

where

i is the interest rate,

n is the number of years and

fv is the future worth.

STEP 3: The syntax for finding the rate of return

=IRR(value 1: value n)

Where

value 1: value n is the value of cash flows from the beginning till end.

STEP 4: The syntax for calculating the net present worth of various cash flows is

=20-PV(D3,1,,-C4)+PV(D3,2,,-C5)+PV(D3,3,,C6)+PV(D3,4,,C7)+PV(D3,5,,C8)+PV(D3,6,,C9)

Here by changing the various interest rate (i) from 10% to 100%, the various net
present worth amount is obtained by that syntax.

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STEP 5: By using that syntax, various net present worth amount is obtained for various
interest rates.

YEAR CASH FLOW i NPW

0 -₹ 20.00 10.00% -₹ 7.69
1 ₹ 8.00 20.00% ₹ 0.44
2 ₹ 17.00 30.00% ₹ 5.64
3 ₹ 19.00 40.00% ₹ 9.09
4 ₹ 18.00 50.00% ₹ 11.46
5 ₹ 10.00 60.00% ₹ 13.12
6 ₹ 3.00 70.00% ₹ 14.33
80.00% ₹ 15.21
90.00% ₹ 15.88
100.00% ₹ 16.39

STEP 6: By plotting the interest rates and the net present worth value the various i*
values are obtained.

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 Graphical Approach to estimate i*
₹ 20.00

₹ 15.00
Amount (in Rs.)

₹ 10.00

₹ 5.00

₹ 0.00
% % % % % % % % % % %
00 00 00 00 00 00 00 00 00 00 00
-₹ 5.00 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 0. 0. 0.
10 11

-₹ 10.00

i (interest rate in %)

The i* value obtained by this graphical method is 19.5%

STEP 7: The syntax for calculating the i* value is =IRR(C3:C9).

STEP 8: By using that syntax, the i* value obtained is 19.72%

STEP 9: Since there are i* values, the following function is used to check the
economically justified value.

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STEP 10: Now, Data What-if-analysis Goal seek is selected. A dialog box will
appear. Now select the required values.

STEP 11: The Excel worksheet will calculate the value and the calculated value will be
displayed in the target cell. Now the RIOC for the corresponding first i* is calculated.

STEP 12: The following function is used to check the economically justified value.

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STEP 13: The Excel worksheet will calculate the value and the calculated value will be
displayed in the target cell. Now the RIOC for the corresponding second i* is calculated.

RESULT: By using the economical justification from the excel, the i* value 19.72% is
more correlated with the graph value. So it is selected. Now the cash flow diagram
becomes

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