Question

​(Net present value​ calculation)  Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$105,000 and will generate net cash inflows of ​$20,000 per year for 8 years.

a.  If the discount rate is 7 ​percent, then the​ project's NPV is ​$______. ​(Round to the nearest​ dollar.) The project should be accepted because the NPV is (positive/negative) and therefore (adds/does not add) value to the firm.  

b.  If the discount rate is 17 ​percent, then the​ project's NPV is ​$_____. ​(Round to the nearest​ dollar.) The project should be accepted because the NPV is (positive/negative) and therefore (adds/does not add) value to the firm.  ​  

c.  This​ project's internal rate of return is ____%. ​(Round to two decimal​ places.) If the​ project's required discount rate is 7%, then the project (should/ should not) be accepted, because the IRR is (higher/lower than) than the required discount rate. If the​ project's required discount rate is 17​%, then the project (should/should not) be ​accepted, because the IRR is (higher/ lower than) than the required discount rate.    

Answer 1

Solution:

Part A )

When discount rate is 7%

NPV = 14,425.97

NPV is Positive

Therefore adds value to the firm.  

Part B )

When discount rate is 17%

NPV = -20,856.75

NPV is negative

Therefore does not add value to the firm.  

Part C )

This​ project's internal rate of return is _10.44%. ​

If the​ project's required discount rate is 7%, then the project should be accepted, because the IRR is higher than the required discount rate. 

If the​ project's required discount rate is 17​%, then the project should not be ​accepted, because the IRR is lower than the required discount rate.