Question

Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$105,000 and will generate net cash inflows of ​$17,000 per year for 9 years.

a. What is the​ project's NPV using a discount rate of 7 percent​? Should the project be​ accepted? Why or why​ not?

b. What is the​ project's NPV using a discount rate of 16 ​percent? Should the project be​ accepted? Why or why​ not?

c. What is this​ project's internal rate of​ return? Should the project be​ accepted? Why or why​ not?

Answer 1

a.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$105,000. Indicate the initial cash flow by 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 discount rate of 7%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 7% discount rate is $5,758.95.

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

b.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$105,000. Indicate the initial cash flow by 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 discount rate of 16%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 16% discount rate is -$26,688.75.

The project should not be accepted since it generates a negative net present value.

c.Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$105,000. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years 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 the project is 8.27%.

The project should be accepted if it is discounted at a discount rate of 7% since the internal rate of return is higher than the discount rate. The project should be rejected if it is discounted at a discount rate of 16% since the internal rate of return is lower than the discount rate.