Homework: Homework 5 Save Score: 0 of 1 pt 2 of 5 (2 complete) Hw Score: 40%, 2

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Homework: Homework 5 Save Score: 0 of 1 pt 2 of 5 (2 complete) Hw Score: 40%, 2 of 5 pts P11-3 (similar to) Question Help (Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $95,000 and will generate net cash infows of $17,000 per year for 9 years. a. What is the project's NPV using a discount rate of 9 percent? Should the project be accepted? Why or why not? b. What is the project's NPV using a discount rate of 14 percent? Should the project be accepted? Why or why not? c. What is this project's internal rate of retun? Should the project be accepted? Why or why not? a. If the discount rate is 9 percent, then the project's NPV is $(Round to the nearest dollar:) Enter your answer in the answer box and then click Check Answer Clear All Check Answer emaining

Explanation / Answer

Initial Outlay = $95,000
Annual Cash Inflows = $17,000
Period = 9 years

Answer a.

Discount Rate = 9%

NPV = -$95,000 + $17,000 * PVIFA(9%, 9)
NPV = -$95,000 + $17,000 * (1 - (1/1.09)^9) / 0.09
NPV = -$95,000 + $17,000 * 5.9952
NPV = $6,918

NPV of this project is positive. So, we should accept this project.

Answer b.

Discount Rate = 14%

NPV = -$95,000 + $17,000 * PVIFA(14%, 9)
NPV = -$95,000 + $17,000 * (1 - (1/1.14)^9) / 0.14
NPV = -$95,000 + $17,000 * 4.9464
NPV = -$10,911

NPV of this project is negative. So, we should reject this project.

Answer c.

Let IRR be i%

NPV = -$95,000 + $17,000 * PVIFA(i%, 9)
0 = -$95,000 + $17,000 * PVIFA(i%, 9)

Using financial calculator, i = 10.76%

IRR of the project is 10.76%

This project should be accepted if required rate of return is lower than 10.76%

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