Task 4. Capital Budgeting for a New Machine A few months have now passed and Aer

Question

Task 4. Capital Budgeting for a New Machine  

A few months have now passed and Aero Plain, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:

Year 1                      $950,000

Year 2                   $1,100,000

Year 3                   $1,300,000

Year 4                   $1,400,000

You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,500,000.

1.    What is the project

Explanation / Answer

Net Present Value = -3500000+950000/1.15 +1100000/1.15^2 +1300000/1.15^3 +1400000/1.15^4 =-186929.36

company should not accept project on NPV analysis

let IRR =r

3500000 = 950000/(1+r) +1100000/(1+r)^2 +1300000/(1+r)^3 +1400000/(1+r)^4

r=12.5%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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