Question

Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $50. However, once built, the machine will last for 20 years and will require no maintenance. The machine takes one year to build and it will cost $1,000 to build. Your buddy wants to know if he should invest the money to construct it. If the interest rate is 3% per year, what should your buddy do?

1. To make the decision you need to calculate the net present value (NPV) of the machine.

The NPV of the machine is $????. (round to the nearest dollar, if negativ use -)

2. You convince your friend to improve the machine so that the amount of produced money will increase every year by 2% over the 20 years.

The NPV of the new machine is $????. (round to the nearest dollar, if negativ use -)

3. What is the IRR of the machine in b.?

The IRR of the machine is ????%. (round to two decimals)

Answer 1

a) NPV of the project is -277.79

Year	Cash Flow	PV @3%
0	-1000	-1,000.00
1	0	0.00
2	50	47.13
3	50	45.76
4	50	44.42
5	50	43.13
6	50	41.87
7	50	40.65
8	50	39.47
9	50	38.32
10	50	37.20
11	50	36.12
12	50	35.07
13	50	34.05
14	50	33.06
15	50	32.09
16	50	31.16
17	50	30.25
18	50	29.37
19	50	28.51
20	50	27.68
21	50	26.88
	NPV	-277.79

b) NPV is Still negative -139.48

Year	Cash Flow	PV @3%
0	-1000	-1,000.00
1	0	0.00
2	50	47.13
3	51.00	46.67
4	52.02	46.22
5	53.06	45.77
6	54.12	45.33
7	55.20	44.89
8	56.31	44.45
9	57.43	44.02
10	58.58	43.59
11	59.75	43.17
12	60.95	42.75
13	62.17	42.33
14	63.41	41.92
15	64.68	41.52
16	65.97	41.11
17	67.29	40.71
18	68.64	40.32
19	70.01	39.93
20	71.41	39.54
21	72.84	39.16
	NPV	-139.48

c) To calculate IRR use formulae =IRR and select the cash flows from year 0 to 21

IRR = 1.31%