Elgin Restaurant Supplies is analyzing the purchase of manufacturing equipment that will cost $30,000. The annual cash inflows are as follows. Use Appendix D.
Year | Cash Flow | |||
1 | $15,000 | |||
2 | 13,000 | |||
3 | 8,000 | |||
a. Determine the IRR using interpolation. (Round the intermediate calculations to the nearest whole dollar. Round the final answer to 2 decimal places.)
IRR %
b. With a cost of capital of 9 percent, should the machine be purchased?
Yes
No
c. With information from part b, compute the PI. (Round the final answer to 3 decimal places.)
PI
a) | For IRR using interpolation method, we need to calculate NPV at two rates | |||||
Let us calculate NPV at 9% rate and 15% rate | ||||||
Year | Cash Flow | PV Factor At 9% | PV Of Cash Flow At 9% | PV Factor At 15% | PV Of Cash Flow At 15% | |
0 | -30000 | 1 | $ -30,000 | 1 | -30000 | |
1 | 15000 | 0.9174 | $ 13,761 | 0.8696 | $ 13,043 | |
2 | 13000 | 0.8417 | $ 10,942 | 0.7561 | $ 9,830 | |
3 | 8000 | 0.7722 | $ 6,177 | 0.6575 | $ 5,260 | |
NPV | $ 880 | $ -1,867 | ||||
IRR = 9+ [880/(880+1867) *6] | ||||||
=9+1.9221 | ||||||
=10.92% (Approx) | ||||||
=1082% (exact using excel function) | ||||||
b) | As calculated above NPV at 9% discount rate is positive. | |||||
Hence the machine should be purchased | ||||||
c) | PI = Sum of PV Of Cash Flow / Initial Investment | |||||
=(13761+10942+6177)/30000 | ||||||
=1.029 | ||||||
Let me know if the answer is wrong . (before you rate.)
Elgin Restaurant Supplies is analyzing the purchase of manufacturing equipment that will cost $30,000. The annual...
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