Question

Kingston Corp. is considering a new machine that requires an initial investment of $550,000 installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the machine are $89,000 during the first three years, $95,000 during years 4 through 6 and $105,000 during the last two years.

(1) Develop the timeline.

(2) Calculate the internal rate of return (IRR).

(3) Calculate the net present value (NPV) at the following required rates of return: a. 3%, b. 4%, c. 8%, d. 9%.

(4) Using IRR and NPV criterion, comment if the project should be accepted or rejected at each of the required rates of return in question (3).

(5) Plot the net present value (NPV) profile with NPV on the Y-axis, and rates of return on the X-axis.

Answer 1

1. Screen shot attached

2. Screen shot attached. IRR is approx. 7.61% where NPV is Zero. Shown the calculations in the screen shot.

Project should be accepted at 3 and 4% discount rate and reject at the required rate of return at 8 and 9%.

Thank you,

Naveen