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 ​$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?

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= -$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.