Question

Tall Oaks Corp. is considering a new machine that requires an initial investment of $480,000 installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the machine are $89,000 for each of the 8 years and nothing thereafter. a. Calculate the net present value of the machine if the required rate of return is 11 percent. b. Calculate the IRR of this project. c. Should Tall Oaks accept the project (assume that it is independent and not subject to any capital rationing constraint)? In your own words, explain your answer

Answer 1

a.	Net Present value			$     -21,995.07
	Working:
	Year	Cash flow	Discount factor	Present value
	a	b	c=1.11^-a	d=b*c
	0	$       -4,80,000	1.0000	$ -4,80,000.00
	1	89,000	0.9009	80,180.18
	2	89,000	0.8116	72,234.40
	3	89,000	0.7312	65,076.03
	4	89,000	0.6587	58,627.06
	5	89,000	0.5935	52,817.17
	6	89,000	0.5346	47,583.03
	7	89,000	0.4817	42,867.60
	8	89,000	0.4339	38,619.46
		Net Present value		-21,995.07
b.	IRR	9.70%
	Working;
	IRR is the rate at which Net Present value is zero. For being a project acceptable, IRR must be more than required rate of return.
	Year	Cash flow
	0	$       -4,80,000
	1	89,000
	2	89,000
	3	89,000
	4	89,000
	5	89,000
	6	89,000
	7	89,000
	8	89,000
	IRR	=irr(C27:C35)
		9.70%
c.	No, Tall Oaks should not accept the project.
	Net Present value	$     -21,995.07
	IRR	9.70%
	Net Present value is negative. It means if we invest in this project, we are loosing money as of today at the required rate of return.
	Further IRR is not more than required rate of return. So, it ilso indicates that project is returning it's required return.
	On the both basis , project is not acceptable.