Question

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.18 million and create incremental cash flows of $820,227.00 each year for the next five years. The cost of capital is 11.69%. What is the net present value of the J-Mix 2000?

Answer format: Currency: Round to: 2 decimal places.

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.96 million and create incremental cash flows of $500,207.00 each year for the next five years. The cost of capital is 9.34%. What is the internal rate of return for the J-Mix 2000?

Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.98 million and create incremental cash flows of $640,301.00 each year for the next five years. The cost of capital is 9.10%. What is the profitability index for the J-Mix 2000?

Answer format: Number: Round to: 3 decimal places.

I would really appreciate the Help!! :) would be great if you could show the steps (not on excel) for better understanding! Thank You~

Answer 1

1)

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = Annuity * [1 - 1 / (1 + r)ⁿ] / r - Initial investment

Net present value = 820,227 * [1 - 1 / (1 + 0.1169)⁵] / 0.1169 - 1,180,000

Net present value = 820,227 * [1 - 0.575345] / 0.1169 - 1,180,000

Net present value = 820,227 * 3.632632 - 1,180,000

Net present value = $1,799,583.21

2)

Internal rate of return is the rate that makes initial investment equal to present value of cash inflows

Investment = Annuity * [1 - 1 / (1 + r)ⁿ] / r

1,960,000 = 500,207 * [1 - 1 / (1 + r)⁵] / r

Using trial and error method, i.e., after trying various values for R, lets try R as 8.72%

1,960,000 = 500,207 * [1 - 1 / (1 + 0.0872)⁵] / 0.0872

1,960,000 = 500,207 * [1 - 0.658344] / 0.0872

1,960,000 = 500,207 * 3.918075

1,960,000 = 1,960,000

Therefore, IRR is 8.72%

3)

Profitability index = Present value / initial investment

Present value = Annuity * [1 - 1 / (1 + r)ⁿ] / r

Present value = 640,301 * [1 - 1 / (1 + 0.091)⁵] / 0.091

Present value = 640,301 * [1 - 0.646958] / 0.091

Present value = 640,301 * 3.87958

Present value = $2,484,098.829

Profitability index = 2,484,098.829 / 1,980,000

Profitability index = 1.255