Question

Vitalife Pty Ltd is considering buying a new vitamin C extraction machine. The machine is estimated to cost $140,000 which can last for 7 years before it becomes too costly to maintain and can be sold for scrap at $20,000. The project is estimated to bring in additional $27,000 cash inflow and incur $12,000 in additional expenses related to the running the machine in the first year. The company expects there will be an annual sales growth of 6% from year 2 onward. Expenses are also expected to grow by 3% annually from the second year of the operation.  

The company plans to fund the purchase of the new machine using a bank loan with an interest rate of 11%.

1. How long is the payback period for this project? Blank 1 years. Case sensitive. Type in 7.00 (two decimal places) for 7 years.
2. What is the NPV for this project? $Blank 2.  Case sensitive. Type in 120,000.00 (two decimal places) for $120,000.00, or -120,000.00 for negative $120,000.00.
3. What is the IRR for this project?  Blank 3%.  Case sensitive. Type in 20.00 (two decimal places) for 20%.

required rate of return is 11%

Answer 1

IRR IS THE RATE AT WHICH pv of cash inflow = pv of cash outflow