Question

Kingston Corporation is considering a new machine that requires an initial investment of $800,000, including installation costs, and has a useful life of eight years. The expected annual after-tax cash flows for the machine are $89,000 during the first three years, $150,000 during years four through six, and $205,000 during the last two years.

Plot the NPV profile (NPV on the Y-axis and the required rates of return on the X-axis
Please explain how to actually plot the NPV profile on excel.

Answer 1

To plot the NPV profile in Excel, input a range of discount rates, calculate NPV using after-tax cash flows and the initial investment, then graph these values as an XY (Scatter) chart with discount rates on the X-axis and NPV on the Y-axis.

Step-by-step explanation:

To plot the NPV profile for Kingston Corporation's potential investment in a new machine, you will follow a series of steps in Excel. First, list a range of different required rates of return (discount rates) in one column. Then for each discount rate, you will calculate the Net Present Value (NPV) using Excel's NPV function and the given after-tax cash flows, including the initial investment. Finally, you will create an XY (Scatter) chart with the discount rates on the X-axis and the corresponding NPVs on the Y-axis. Here's a brief step-wise explanation:

• Open Excel and type in your discount rates in one column (eg. Column A, from A2 downwards).
• In the next column (Column B), calculate NPV for each rate. Remember to include the initial investment of $800,000 as a negative value at the start of your cash flow series.
• After calculating all NPVs, select the data and insert an XY (Scatter) chart from the Excel menu.
• Adjust your chart labels and title to reflect that it's an NPV profile chart.

NPV calculations at different rates are crucial in assessing the viability of investment projects, helping to determine whether the cash flows generated by the machine justify its initial investment cost.