Question

(Net present value​ calculation)  Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$95,000 and will generate net cash inflows of ​$19,000 per year for 11 years.

a.  What is the​ project's NPV using a discount rate of 9 percent​? Should the project be​ accepted? Why or why​ not?

b.  What is the​ project's NPV using a discount rate of 13 ​percent? Should the project be​ accepted? Why or why​ not?

c.  What is this​ project's internal rate of​ return? Should the project be​ accepted? Why or why​ not?

Answer 1

a.

Annual Cash Flows	$ 19,000
PVA 9%, n=11	6.80519
Present value of Cash Inflows	$ 129,299
Initial Investment	(95,000)
Net Present Value	$ 34,299

Yes, the project should be accepted, as the Net Present Value is greater than zero.

b.

Annual Cash Flows	$ 19,000
PVA 13%, n=11	5.68694
Present Value of Cash Inflows	$ 108,052
Initial Investment	(95,000)
Net Present Value	$ 13,052

Yes, the project should be accepted, as the Net Present Value is again greater than zero.

c. Payback period = $ 95,000 / $ 19,000 = 5.0000

PV factor of 5.0000 corresponds most closely to 5.0286 found on the 11th row in the 16 % column on the PVA table.

Therefore, IRR of the project is very close to 16 %.