Calculate NPV—compare to IRR South Bay Manufacturing Ltd. is considering the investment of $230,000 in a new machine. The machine will generate cash flow of $40,000 per year for each year of its eight-year life and will have a salvage value of $26,000 at the end of its life. The company’s cost of capital is 10%.
Required:
a. Calculate the net present value of the proposed investment. (Ignore income taxes.)
b. What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
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