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In: Accounting

Los Dangles is considering a new machine which will reduce net cash inflow by $40 000...

Los Dangles is considering a new machine which will reduce net cash inflow by $40 000 in the current year, but increase net cash inflow by $8000, $12000, $16000, $20 000, $24 000 and $28 000 in the following six years.

a. If Los Dangles’ cost of capital is 10 per cent, should it buy the machine?

b. If Los Dangles’ cost of capital is 20 per cent, should it buy the machine?

c. What is the IRR for the machine?

d. Advise management on the purchase of the machine.

Solutions

Expert Solution

a)
Year Cash Flow Discount Rate @10% Present Value
0 $ (40,000.00) 1.0000 $ (40,000.00)
1 $    8,000.00 0.9091 $    7,272.73
2 $  12,000.00 0.8264 $    9,917.36
3 $  16,000.00 0.7513 $  12,021.04
4 $  20,000.00 0.6830 $  13,660.27
5 $  24,000.00 0.6209 $  14,902.11
6 $  28,000.00 0.5645 $  15,805.27
NPV $  33,578.77
It should buy the machine because NPV is positive.
b)
Year Cash Flow Discount Rate @20% Present Value
0 $ (40,000.00) 1.0000 $ (40,000.00)
1 $    8,000.00 0.8333 $    6,666.67
2 $  12,000.00 0.6944 $    8,333.33
3 $  16,000.00 0.5787 $    9,259.26
4 $  20,000.00 0.4823 $    9,645.06
5 $  24,000.00 0.4019 $    9,645.06
6 $  28,000.00 0.3349 $    9,377.14
NPV $  12,926.53
It should buy the machine because NPV is positive.
c)
Year Cash Flow
0 $ (40,000.00)
1 $    8,000.00
2 $  12,000.00
3 $  16,000.00
4 $  20,000.00
5 $  24,000.00
6 $  28,000.00
IRR 29.82%
d) The management should buy the  machine as NPV  is positive and IRR is greater than the cost of capital.

ekkarill92 answered 2 years ago
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