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A new machine will cost $100,000 today and generate cash inflows of $35,000 each year for...

A new machine will cost $100,000 today and generate cash inflows of $35,000 each year for 4 years. (a) If the firm has a 10% cost of capital, should the firm buy this machine under NPV rule? (Please calculate the NPV of this investment and explain your reason) (b) How high can the discount rate be before you would reject buying this machine? (Please explain the reason. Your answer should have at least one decimal digit)

Solutions

Expert Solution

a)
Year Cash Flow PV Factor PV Of Cash Flow
a b c=1/1.10^a d=b*c
0 $ -1,00,000 1 $     -1,00,000.00
1 $        35,000 0.909090909 $           31,818.18
2 $        35,000 0.826446281 $           28,925.62
3 $        35,000 0.751314801 $           26,296.02
4 $        35,000 0.683013455 $           23,905.47
NPV $           10,945.29
Since NPV is positive compnay should buy the machine.
b) High discount rate would be IRR
Year Cash Flow
0 -100000
1 35000
2 35000
3 35000
4 35000
IRR = 14.96%
Upto 14.96% NPV will be positive hence project can be accepted , above 14.96% NPV will be negative hence project need to ne rejected.

jeff jeffy answered 2 years ago
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