Question

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $57,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  

Year	Cash Flow
1	$	21,000
2		24,000
3		28,000
4		14,000
5		9,000

a.    If the cost of capital is 11 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

What is the Net present value? ________________

b..

what is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

What is the Internal rate of return? _______________%

c, Should the project be accepted? Yes or No.

Please give a calculated solution using a calculator. Thanks!

Answer 1

Part A:

NPV of Machine = PV of Cash Inflows - PV of Cash Outflow

Part B:

IRR is the rate at which PV of Cash Inflows are equal to Machine Cost.

IRR = Rate at which least +ve NPV + [ NPV at that rate / change in NPV due to 1% inc in disc Rate ] * 1%

= 23% + [ 296.87 / 1075.40 ] *1%

= 23% + 0.28%

= 23.28%

Part C:

Project will be accepted as NPV > 0 and IRR> Cost of Capital