Question

NPV for varying capital cost rates. (using excel)

Your small medical practice is evaluating a new diagnostic testing machine. The purchase requires an initial investment of $25,000 and will generate cash inflows of $5,000 per year for eight years. For each of the required rates of return listed

(1) calculate the net present value,

(2) indicate whether to accept or reject the machine, and

(3) briefly explain your decisions.

The cost of capital is 10%.

The cost of capital is 12%.

The cost of capital is 14%.

Answer 1

If the cost of capital is 10%.

Net Present Value [NPV]

Net Present Value [NPV] = Present Value of cash inflows – Initial Investments

= $5,000 [PVIFA 10%, 8 Years] - 25,000

= [ $5,000 x 5.334926] -25,000

= $ 26,674.63 - 25,000

= $1,674.63 [ Positive NPV ]

Accept / Reject Decision

The Project Should be accepted, Since the Net Present Value [NPV] is Positive $1,674.63

If the cost of capital is 12%.

Net Present Value [NPV]

Net Present Value [NPV] = Present Value of cash inflows – Initial Investments

= $5,000 [PVIFA 12%, 8 Years] - 25,000

= [ $5,000 x 4.9676397] -25,000

= $24,838.20 - 25,000

= ($161.80) [ Negative NPV ]

Accept / Reject Decision

The Project Should not be accepted, Project Should be Rejected, Since the Net Present Value [ NPV] is Negative ($161.80)

If the cost of capital is 14%.

Net Present Value [NPV]

Net Present Value [NPV] = Present Value of cash inflows – Initial Investments

= $5,000 [PVIFA 14%, 8 Years] - 25,000

= [ $5,000 x 4.63886] -25,000

= $23,194.32 - 25,000

= ($1,805.68) [ Negative NPV ]

Accept / Reject Decision

The Project Should not be accepted, Project Should be Rejected, Since the Net Present Value [ NPV] is Negative ($1,805.68)