Magic Co. is considering the purchse of a new machine to manufacture its own bra

Question

Magic Co. is considering the purchse of a new machine to manufacture its own brand of magic kits for large magic shows. The machine cost $400,000 and has an estimate life for 5 years and no salvage value. Projected annual income from magic kits operations and net cash flow are as follows: Income from Operations Net cash flow Year 1 $100,000 $180,000 Year 2 $40,000 $120,000 Year 3 $20,000 $100,000 Year 4 $10,000 $90,000 Year 5 $10,000 $90,000 a) compute the average rate of return for the investment in the new magic kits. b) compute the cash pay back period for the investment for the new magic kits. c) determine the net present value of the net cash flows for this investment. Assume a 12% minimum rate of return. does the investment meet or exceed the disired rate of return?

Explanation / Answer

NPV= 400000+ 100,000/(1+0.12) + 180,000/(1+0.12)^2 + 40,000/(1.12)^3 +120,000/(1.12)^4 + 20,000/(1.12)^5

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