A new computer system will require an initial outlay of $24,500, but it will inc
ID: 2421702 • Letter: A
Question
A new computer system will require an initial outlay of $24,500, but it will increase the firm’s cash flows by $4,900 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%. What if it is 14%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Rate of Return NPV Worth Installing 9% $ (Click to select)YesNo 14% $
b. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Maximum discount rate
Explanation / Answer
a).Cashflows
-1769.57
b).
a).Cashflows
Present value factor @ 9% Present value of cash flows -24500 1.00 -24500.00 4900 0.92 4495.41 4900 0.84 4124.23 4900 0.77 3783.70 4900 0.71 3471.28 4900 0.65 3184.66 4900 0.60 2921.71 4900 0.55 2680.47 4900 0.50 2459.14 NPV 2620.61 Cashflows Present value factor @ 14% Present value of cash flows -24500 1.00 -24500.00 4900 0.88 4298.25 4900 0.77 3770.39 4900 0.67 3307.36 4900 0.59 2901.19 4900 0.52 2544.91 4900 0.46 2232.37 4900 0.40 1958.22 4900 0.35 1717.74 NPV-1769.57
b).
Calcuilation of high discount rate be before you would reject the project: Cashflows Present value factor @ 12% Present value of cash flows -24500 1.000000 -24500.000000 4900 0.892857 4375.000000 4900 0.797194 3906.250000 4900 0.711780 3487.723214 4900 0.635518 3114.038584 4900 0.567427 2780.391593 4900 0.506631 2482.492494 4900 0.452349 2216.511155 4900 0.403883 1979.027817 NPV -158.57 Cashflows Present value factor @ 11% Present value of cash flows -24500 1.00 -24500.00 4900 0.90 4414.41 4900 0.81 3976.95 4900 0.73 3582.84 4900 0.66 3227.78 4900 0.59 2907.91 4900 0.53 2619.74 4900 0.48 2360.13 4900 0.43 2126.24 NPV 716.00 Rate = 11% + (716 / 716 + 158.57) Rate = 11.82%Related Questions
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