Apply the Concept A firm with a cost of capital of 9 percent is considering a ne

Question

Apply the Concept

A firm with a cost of capital of 9 percent is considering a new computer-aided design (CAD) system that costs $686,000 and will produce net cash inflows of $280,687 at the end of each year for the next three years.

(See Exhibit 19B-2)

Required:

1. The discount factor associated with the IRR for the project (round to three decimal places): 2. IRR for the CAD system =  percent (round to the nearest whole percent) 3. The CAD system should be - Select your answer -acceptedrejectedItem 3 because the IRR is - Select your answer -greater thanequal toless thanItem 4 the required rate of return.

Explanation / Answer

1) At 9% ,Present value annuity factor ,3 years = 2.53129(discount factor) ,Total value of cash inflow = 2.53129 *280687 = 710501.51

At 13% present value annuity factor,3 years = 2.36115(discount factor) ,total value of cash inflow =2.36115 * 280687 = 662744.84

2)For IRR will use following formula:

= LDR + [(Present value at LDR -initial investment )(HDR-LDR)/ (Present value at LDR -present value at HDR)]

= 9 + [710501.51 - 686000) (13-9) / (710501.51 - 662744.84 ) ]

= 9 + [24501.51* 4 ) / 47756.67]

= 9 + [98006.04 / 47756.67]

= 9 + 2.05

= 11.05%

3) Should select the project because IRR is greater than required rate of return

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