Question

A new computer system will require an initial outlay of $19,250, but it increase the firm's cash flows by $4,100 a year for the next 7 years. A. Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 15%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

A. NPV at required return 10%

NPV=Initial investment+PV of annual cashflows for 7 yrs. Discounted at the required rate of return

ie. -19250+(4100*4.86842)=                                                   (P/A,4100 ;i=10%; n=7 )

710.52

It is worth installing the system as the NPV of its cash flows is POSITIVE

b.NPV at required return 15%

ie. -19250+(4100*4.16042)=                                                   (P/A,4100 ;i=15%; n=7 )

-2192.278

It is NOT worth installing the system as the NPV of its cash flows is NEGATIVE