The company Betamax is considering buying a new barcoding machine. The investmen

Question

The company Betamax is considering buying a new barcoding machine. The investment proposal passed the initial screening tests, so the company now wants to analyze the proposal using the discounted cash flow methods. The bar coding machine costs $48,000, has a five-year life, and has no residual value. The estimated net cash inflows are $13,000 per year over its life. The company's hurdle rate is M')6. 1) Compute the bar-coding machine's NPV. 2) Find the bar-coding machine's IRR 3) Should Betamax buy the bar coding machine? Why or why not?

Explanation / Answer

Calculation of NPV:

NPV = Present Value of Cash Inflows - Initial lnvestment
        = $13000*PVAF12% 5years - 48000
       =$13000* 3.6047 - 48000 = 46861.1 - 48000 = (1138.9)

IRR = AT IRR NPV is Zero so
= 13000*PVAF - 48000 = 0
Here PVAF must be 3.6923 at 5 years
Check PVAF table for this value at 5 years which corresponds to 11% approx, exact value is 11.039%

3). It is not suggested to buy bar coding machine because is NPV is negative.

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