Question

home / study / business / finance / finance questions and answers / A New Computer System Will Require An Initial Outlay Of $17,500, But It Will Increase The Firm’s ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: A new computer system will require an initial outlay of $17,500, but it will increase the firm’s ... A new computer system will require an initial outlay of $17,500, but it will increase the firm’s cash flows by $3,500 a year for each of the next 8 years. a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 9%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 14%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) include the worth installing for each!

Answer 1

Answer a.

Initial outlay = $17,500
Incremental Cash flows = $3,500
Life of project = 8 years
Rate of return = 9%

NPV = -$17,500 + $3,500/1.09 + $3,500/1.09^2 + ... + $3,500/1.09^8
NPV = -$17,500 + $3,500 * (1 - (1/1.09)^8) / 0.09
NPV = -$17,500 + $3,500 * 5.534819
NPV = $1,871.87

NPV of the project is $1,871.87. Yes, this computer is worth investing.

Answer b.

Initial outlay = $17,500
Incremental Cash flows = $3,500
Life of project = 8 years
Rate of return = 14%

NPV = -$17,500 + $3,500/1.14 + $3,500/1.14^2 + ... + $3,500/1.14^8
NPV = -$17,500 + $3,500 * (1 - (1/1.14)^8) / 0.14
NPV = -$17,500 + $3,500 * 4.638864
NPV = -$1,263.98

NPV of the project is -$1,263.98. No, this computer is not worth investing.