Problem 12-18 Net present value and internal rate of return methods [LO4] The Pa

Question

Problem 12-18 Net present value and internal rate of return methods [LO4]
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $60,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
  
Year   Cash Flow
1   $ 23,000
2   26,000
3   29,000
4   15,000
5   8,000
  

a.  
If the cost of capital is 13 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
  
Net present value   $   
  

b.  
What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

Internal rate of return   %
  

c.   Should the project be accepted?
      
   
   Yes
   No

Explanation / Answer

IRR = 23.75%

The project having positive NPV and IRR greater than cost of capital should be accepted

year 1 2 3 4 5 cash flows 23000 26000 29000 15000 8000 p.v.f @ 13% 0.885 0.783 0.693 0.613 0.543 Present Value 20353.98 20361.81 20098.45 9199.781 4342.079 Total Present value of cash inflows 74356.11 Cash outflow 60000 NPV 14356.11 Calculation of NPV @ 23.75% year 1 2 3 4 5 cash flows 23000 26000 29000 15000 8000 p.v.f @ 23.75% 0.808 0.653 0.528 0.426 0.345 Present Value 18585.86 16977.86 15302.5 6396.029 2756.538 Total Present value of cash inflows 60018.78 Cash outflow 60000 NPV 18.78437

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.