Question

A new computer system will require an initial outlay of $18,750, but it will increase the firm’s cash flows by $4,200 a year for each of the next 6 years.

a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 8%. (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 13%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

For part (c), to check the discount rate, we can use Goal seek function in excel. Let's see how.

In order to calculate the discount rate beyond which we reject the project. We need to understand that the moment our NPV becomes zero, We can decide the rate beyond which we will reject the project.

Thus, we will use the goal seek function like this:

1. Go to Goal Seek in What if analysis in the Data tab

2. When Goal Seek will open, In the Set cell, select the column of NPV.(In the figure below, E11 has been written which contrains value of NPV). Set it to 0 & change the discount rate column which is G3.The answer is 9.162% as calculated by Goal seek below(yellow portion below)