Question

Need an explanation as to WHY the answer is "yes we should buy it". Spend 8000...

Need an explanation as to WHY the answer is "yes we should buy it".

  1. Spend 8000 on a new machine. You think it will provide after tax cash inflows of 3500 per year for the next three years. The cost of funds is 8%. Find the NPV, IRR, and MIRR. Should you buy it?

NPV = 1019.84

IRR = .1493

MIRR = .1241

Should I buy it? = Yes is the answer BUT I NEED TO UNDERSTAND WHY YES IS THE ANSWER

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Homework Answers

Answer #1

I DID SOLVE MIRR FOR YOU. YOU HAS DOUBT REGARDING WHICH RATE TO USE

THIS DOUBT IS ALSO VERY GENUINE THAT HOW TO DECIDE ABOUT THE BEST PROJECT

THEN ANSWER IS : NPV METHOD, SO AS NPV IS POSITIVE, SELECT IT.

NPV METHOD SAYS HOW MUCH WEALTH IS GENERATED FOR SHAREHOLDERS. IT DOES TAKE INTO ACCOUNT ALL CASHFLOWS, IT USES TIME VALUE OF MONEY CONCEPT. SO IT IS FULLY CORRECT METHOD

YES, WHEN WE HAVE SINGLE PROJECT & WHERE SINGLE CASH OUTFLOW IS THERE, WE CAN ALSO USE IRR, MIRR OR NPV, ALL WILL GIVE SAME RESULTS

BUT WHEN MORE THAN ONE PROJECTS ARE THERE, IRR & MIRR FAILS DUE TO CASHFLOW TIMINGS AND REINVESTMENT ASSUMPTIONS

HOPE I MADE IT CLEAR. HAPPY TO HELP YOU. THANK YOU

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