Question

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $69,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  

Year	Cash Flow
1	$	32,000
2		37,000
3		34,000
4		27,000
5		13,000

  
a. If the cost of capital is 11 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
  

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

c. Should the project be accepted?
  

	Yes
	No

Answer 1

Part A:

NPV = PV of Cash Inflows - PV of Cash Out flows

Part B:

IRR is the rate at which PV of Cash Inflows are equal to PV of Cash Out flows

IRR = Rate at which least +ve NPV + [ NPV at that rate / change in NPV due to 1% inc in disc Rate ] * 1%

= 34% + [ 1000.45 / 1147.92 ] * 1%

= 34% + 0.87* 1%

= 34% +0.87%

= 34.87%

Part C:

Project will be accepeted as NPV >0 and IRR > Cost.

Pls comment, if any further assistance is required