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 $90,000 and will generate net cash inflows of $17,000 per year for 11 years.

a.  If the discount rate is 8%, then the​ project's NPV is $________​ (Round to the nearest​ dollar.)

The project (should not be/ Should be) accepted because the NPV is (negative/positive) and therefore (does not add/ adds) value to the firm. ​(Select the correct answer)

b.  If the discount rate is 13% , then the​ project's NPV is $_________ ​(Round to the nearest​ dollar.)

The project (should not be/ Should be) accepted because the NPV is (negative/positive) and therefore (does not add/ adds) value to the firm. ​(Select the correct answer)

c. This​ project's internal rate of return is _______% ​(Round to two decimal​ places.)

If the​ project's required discount rate is 8%, then the project (should not be/ should be) ​accepted, because the IRR is (lower than/ higher than) the required discount rate ​(Select the correct answer)

If the​ project's required discount rate is 13%, then the project (should not be/ should be) ​accepted, because the IRR is (lower than/ higher than) the required discount rate ​(Select the correct answer)

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= -$90,000. 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 8%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 8% discount rate is $31,362.39.

The project should be accepted because the NPV is positive and therefore adds value to the firm.

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

• Press the CF button.
• CF0= -$90,000. 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 13%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 13% discount rate is $6,677.9992 $6,678.

The project should be accepted because the project is positive and therefore adds value to the firm.

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

• Press the CF button.
• CF0= -$90,000. 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 14.72%.

If the project's discount rate is 8%, then the project should be accepted, because the IRR is higher than the required discount rate.

If the project's discount rate is 13%, then the project should be accepted, because the IRR is higher than the required discount rate.