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 $66,000. 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	$	28,000
2		28,000
3		28,000
4		33,000
5		11,000

  
a. If the cost of capital is 12 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

1.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=28000/1.12+28000/1.12^2+28000/1.12^3+33000/1.12^4+11000/1.12^5

=$94465.07

NPV=Present value of inflows-Present value of outflows

=$94465.07-$66000

=$28465.07(Approx).

2.Let irr be x%
At irr,present value of inflows=present value of outflows.

66000 =28000/1.12+28000/1.12^2+28000/1.12^3+33000/1.12^4+11000/1.12^5

Hence x=irr=29.47%(Approx).

3.

Hence since NPV is positive;project must be accepted.