The Green Goddess Salad Oil Company is considering the purchase of a new machine

Question

The Green Goddess Salad Oil Company is considering the purchase of a new machine that would increase the speed of manufacturing tires and save money. The net cost of the new machine is $58,000. The annual cash flows have the following projections. (Use a Financial calculator to arrive at the answers.)

If the cost of capital is 12 percent, what is the net present value? (Round the final answer to the nearest whole dollar.)

What is the internal rate of return? (Round the final answer to 2 decimal places.)

The Green Goddess Salad Oil Company is considering the purchase of a new machine that would increase the speed of manufacturing tires and save money. The net cost of the new machine is $58,000. The annual cash flows have the following projections. (Use a Financial calculator to arrive at the answers.)

Explanation / Answer

Year Cash flows Discounting factor12% Discounted cash flows 1 18000 0.893 16074 2 20000 0.797 15940 3 14000 0.712 9968 4 25000 0.636 15900 5 14000 0.567 7938 PV of Inflows A 65820 PV of outflows B 58000 NPV A-B 7820 IRR= PV of oulows/Avg annual inflow Avg inflows=(18000+20000+14000+25000+14000)/5 18200 IRR=58000/18200 3.1868131868 IRR=3.187 3.187 at 5 th year in PV of annuty table is between 17%-18% Year Cash flows 17.00% 18.00% PV of inflows @17% PV of inflows @17% 1 18000 0.855 0.847 15390 15246 2 20000 0.731 0.718 14620 14360 3 14000 0.624 0.609 8736 8526 4 25000 0.534 0.516 13350 12900 5 14000 0.456 0.437 6384 6118 58480 57150 Initial investment 58000 58000 Diiference 480 -850 For 1% difference 1330 ie (480+850) IRR =17%+(NPV at 17% / Total difference)*Difference in rate 0.1736090226 IRR=17.36%

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