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 $60,000. 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	$	20,000
2		25,000
3		26,000
4		30,000
5		15,000

a. If the cost of capital is 10 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.)

	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.)
  

	Internal rate of return %

c. Should the project be accepted?
  

	Yes
	No

Answer 1

a. Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$60,000. . It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital is 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $28,181.38.

b.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$60,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 27.01%.

c.The project should be accepted since it generates a positive net present value.

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