Question

Management is trying to decide whether or not to build a new factory. They have estimated revenues of $90,000 in year one and $70,000 in years two through ten. In 10 years the factory is obsolete. They estimate expenses annually to operate the factory in years 2 through 10 would be $40,000. The cost of the new factory is $310,000 The payments required are $80,000 immediately with the remainder due in one year. The company uses an interest rate of 6.7%. What is the net present value of this factory? $ What can you say about the internal rate of return for this factory? The IRR is less than 6.7%. The IRR is equal to 6.7%. The IRR is greater than 6.7%. Nothing.

Answer 1

The cashflows are shown below in Yearwise

NPV can be found using NPV function in EXCEL

=NPV(rate, Year1 to Year10 cashinflows)-Year0 cash outflow

=NPV(6.7%,Year1 to Year10 cashinflows)-80000

NPV=-$25,664.47

=IRR(values)

=IRR(Year0 to Year10 cashflows)

IRR=3.99%

IRR is less than 6.7%