Big Steve\'s, makers of swizzle sticks, is considering the purchase of a new pla
ID: 2612305 • Letter: B
Question
Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $ 90,000 and will generate net cah inflows of $21,000 per year for 9 years.
What is the project NVP using a discount rate is 11 percent? Should the project be accepted? Why or Why not?
What is the projects NPV using a discount rate of 14%? Should the project be accepted ? why or why not?
What is the project internal rate of return? Should the project be accepted ? why or why not?
A) If the discount rate is 11 percent then the project NPV is ________
B)
Explanation / Answer
1.
Net Cash inflows = $90000
Present Value of net cash inflows @ 11% discount rate = 21000* cumulative PVF @ 11% for 9 years = 21000*5.537 = $116277
NPV = Present Value of Cash inflows - Cash outflows = 116277-90000 = $26277
As the NPV is positive, the project should be accepted.
2.
NPV @ 14% = Present Value of cash inflows @ 14% for 9 years - Cash outflows
= [21000*4.946] - 90000
= $13866
As the NPV is positive, the project should be accepted.
3.
NPV @ 20% = Present Value of cash inflows @ 20% for 9 years - Cash outflows
= [21000*4.031] - 90000
= -$5349
Internal rate of return = {NPV @ 14% / [NPV @ 14% - NPV @ 20%] * Difference in rates } + 14%
= {13866/ [13866 - (-5349)] * 6} + 14
= 18.33%
If the discount rate is 11% then the project NPV is $26277.
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