In: Accounting
Northern Manufacturing Ltd. is considering the investment of
$85,000 in a new machine. The machine will generate cash flow of
$14,000 per year for each year of its eight-year life and will have
a salvage value of $9,000 at the end of its life. The company’s
cost of capital is 10%. Table 6-4 and Table 6-5. (Use
appropriate factor(s) from the tables provided. Round the PV
factors to 4 decimals.)
Required:
Calculation of the net present value of the proposed investment. | |||||
(a) | (b) | (c) | (d) | (e) = (c)*(d) | |
Year | Cashflow | Discounting Factor @10% | Discounted Cash Flows | ||
Year 0 | Outflow | -$ 85,000 | 1/1.10^0 | 1 | -$ 85,000.00 |
Year 1 | Inflow | $ 14,000 | 1/1.10^1 | 0.909091 | $ 12,727.27 |
Year 2 | Inflow | $ 14,000 | 1/1.10^2 | 0.826446 | $ 11,570.25 |
Year 3 | Inflow | $ 14,000 | 1/1.10^3 | 0.751315 | $ 10,518.41 |
Year 4 | Inflow | $ 14,000 | 1/1.10^4 | 0.683013 | $ 9,562.19 |
Year 5 | Inflow | $ 14,000 | 1/1.10^5 | 0.620921 | $ 8,692.90 |
Year 6 | Inflow | $ 14,000 | 1/1.10^6 | 0.564474 | $ 7,902.64 |
Year 7 | Inflow | $ 14,000 | 1/1.10^7 | 0.513158 | $ 7,184.21 |
Year 8 | Inflow | $ 14,000 | 1/1.10^8 | 0.466507 | $ 6,531.10 |
Year 8 | Inflow | $ 9,000 | 1/1.10^8 | 0.466507 | $ 4,198.57 |
Net Present Value (-85000+12727.27+11570.25+10518.41+9562.19+8692.90+7902.64+7184.21+6531.10+4198.57) | -$ 6,112 |
What will the internal rate of return on this investment be relative to the cost of capital? | |||||
Internal rate of return will be lower than the cost of capital of 10% as we the Net present value of the project is negative at 10% cost of capital |