Question

America Cola is considering the purchase of a special-purpose bottling machine for $65,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs EEB (Click the America Cola uses a required rate of return of 18% in its capital budgeting decisions, Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. the icon to view the savings in cash operating costs.) (Click the icon to view the Future Value of Annuity of $1 factors.) (Click the icon to view the Present Value of Annuity of $1 factors.) (Click the icon to view the Future Value of $1 factors.) (Click the icon to view the Present Value of $1 factors.) Read the requirements 1. Net present value. (Use factor amounts rounded to three decimal places. Round your answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) The net present value is S 2. Payback period. (Round your answer to two decimal places.) The payback perlod is years. 3. Internal rate of retun (using the interpolation method). (Use a trial-and-error approach and straight-line interpolation as necessary. Round your answer to the nearest hundredth of a percent, XXx%.) The intemal rate of return (IRR) is Data Table Year Amount S 25,000 22,000 21,000 20,000 S 88,000 Total

Answer 1

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Particulars	Y0	Y1	Y2	Y3	Y4	Total
Purchase cost	(65,000.00)	-	-	-	-	(65,000.00)
Net Savings	-	25,000.00	22,000.00	21,000.00	20,000.00	88,000.00
PV Factor at 18%	1.00	0.847	0.718	0.608	0.515
PV of Net Cash flow	(65,000.00)	21,175.00	15,796.00	12,768.00	10,300.00	(4,961.00)
Ans to 1
Net Present Value	(4,961.00)
Ans to 2
Payback period
Total Savings	88,000.00
No. of Years	4.00
No. of months	48.00
Savings per month	1,833.33
Investment Value	65,000.00
Payback period	35.45	i.e. 35 months approx.
Ans to 3
We know at IRR the NPV of the project is zero.
Cash outflow is $ 65,000 and even at 18% NPV is negative and so assumed rate at 13.9%.
Time	Cash Flow	PV @ 13.9%	Present Value
Time 0	(65,000.00)	1.00	(65,000.00)
Time 1	25,000.00	0.878	21,950.00
Time 2	22,000.00	0.771	16,962.00
Time 3	21,000.00	0.677	14,217.00
Time 4	20,000.00	0.594	11,880.00
NPV			9.00
So NPV is almost zero at 13.9% so IRR is 13.9%