Question

In: Finance

 Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine....

 Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$110,000 and will generate net cash inflows of ​$20,000 per year for 9 years.

a.  What is the​ project's NPV using a discount rate of 88 percent​? Should the project be​ accepted? Why or why​ not?

b.  What is the​ project's NPV using a discount rate of 1717 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?

Solutions

Expert Solution

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

  • Press the CF button.
  • CF0= -$110,000. 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 $14,937.76.

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= -$110,000. 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 17%.
  • Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 17% discount rate is -$20,988.68.  

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= -$110,000. 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 11.17%.

The project should be accepted if the discount rate of the project is 8% since the internal rate of return would be higher than the cost of the project.

The project should not be accepted if the discount rate of the project is 17% since the internal rate of return would be lower than the cost of the project.


Related Solutions

Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine....
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 $19,000 per year for 11 years. a.  What is the​ project's NPV using a discount rate of 8 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​...
Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine....
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​...
Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine....
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 $________​ (Round to the nearest​ dollar.) The project (should not be/ Should be) accepted because the NPV is (negative/positive) and therefore (does not add/ adds) value to the firm. ​(Select the...
Big​ Steve's, a maker of swizzle​ sticks, is considering the purchase of a new plastic stamping...
Big​ Steve's, a maker of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$ 110,000 and will generate free cash inflows of $ 19,000per year for 13 years. a. If the required rate of return is 8 ​percent, what is the​ project's NPV​? b. If the required rate of return is 18 ​percent, what is the​ project's NPV​? c. Would the project be accepted under part ​(a​) or ​(b​)?...
​(Net present value​ calculation) Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a...
​(Net present value​ calculation) Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$110,000 and will generate net cash inflows of ​$17,000 per year for 8 years. a. What is the​ project's NPV using a discount rate of 8 percent​? Should the project be​ accepted? Why or why​ not? b. What is the​ project's NPV using a discount rate of 17 ​percent? Should the project be​...
​(Net present value​ calculation)  Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a...
​(Net present value​ calculation)  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 ​$20,000 per year for 8 years. a.  If the discount rate is 7 ​percent, then the​ project's NPV is ​$______. ​(Round to the nearest​ dollar.) The project should be accepted because the NPV is (positive/negative) and therefore (adds/does not add) value to the firm.   b.  ...
(Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a...
(Net present value calculation) 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 comma 000 and will generate net cash inflows of $21 comma 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 14...
(Net present value​ calculation)  Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a...
(Net present value​ calculation)  Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$95,000 and will generate net cash inflows of ​$21,000 per year for 9 years. a.  What is the​ project's NPV using a discount rate of 8 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​...
​(NPV with varying required rates of return​) Big​ Steve's, a maker of swizzle​ sticks, is considering...
​(NPV with varying required rates of return​) Big​ Steve's, a maker of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$130,000 and will generate free cash inflows of $ 18,000 per year for 12 years. a. If the required rate of return is 7 ​percent, what is the​ project's NPV​? b. If the required rate of return is 20 ​percent, what is the​ project's NPV​? c. Would the project...
​(NPV with varying required rates of return​) Big​ Steve's, a maker of swizzle​ sticks, is considering...
​(NPV with varying required rates of return​) Big​ Steve's, a maker of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$150,000 and will generate free cash inflows of $ 18,500 per year for 13 years. a. If the required rate of return is 5 ​percent, what is the​ project's NPV​? b. If the required rate of return is 16 ​percent, what is the​ project's NPV​? c. Would the project...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT