Homeland Security Systems Solution: Show your work! Equipment $40,000 STEP 1: Av
ID: 2692851 • Letter: H
Question
Homeland Security Systems Solution:Show your work!
Equipment $40,000
STEP 1: Average the inflows
Year Cash Flow
1 $20,000
2 $18,000
3 $13,000
STEP 2: Divide investment by annuity from step 1
STEP 3: Find the rate that corresponds to the value in Step 2:
STEP 4: Calculate the Present Value at 14%
Because the inflows are biased toward the early years, we will use the higher rate of 14%.
Year Cash Flow PVIF @ 14% Present Value
1
2
3
STEP 5: Calculate the Present Value at 15%
Since the NPV is slightly over $40,000, we need to try a higher rate. We will try 15%.
Year Cash Flow PVIF @ 15% Present Value
1
2
INTERPOLATION:
3
PV @ 14%
PV @ 15%
PV @ 14%
Cost
IRR =
b) With a cost of capital of 12 percent, should the machine be purchased?
Explain:
Homeland Security Systems Solution:
Show your work!
Equipment $40,000
STEP 1: Average the inflows
Year Cash Flow
1 $20,000
2 $18,000
3 $13,000
STEP 2: Divide investment by annuity from step 1
STEP 3: Find the rate that corresponds to the value in Step 2:
STEP 4: Calculate the Present Value at 14%
Because the inflows are biased toward the early years, we will use the higher rate of 14%.
Year Cash Flow PVIF @ 14% Present Value
1
2
3
STEP 5: Calculate the Present Value at 15%
Since the NPV is slightly over $40,000, we need to try a higher rate. We will try 15%.
Year Cash Flow PVIF @ 15% Present Value
1
2
INTERPOLATION:
3
PV @ 14%
PV @ 15%
PV @ 14%
Cost
IRR =
b) With a cost of capital of 12 percent, should the machine be purchased?
Explain:
Explanation / Answer
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