(Net present value calculation) Big Steve\'s, makers of swizzle sticks, is consi

Question

(Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment required an initial outlay of $90,000 and will generate net cash inflows of $17,000 per year for 9 years.

a. What is the projects NPV using a discount rate of 9 percent? Should the project be accepted? Why or why not?

b. What is the projects NPV using a discount rate of 17 percent? Should the project be accepted? Why or why not?

c. What is this project's internal rate of return? Should the project be accepted? Why or why not?

If the discount rate is 9 percent, the the project's NPV is $

Explanation / Answer

a.

Should be accepted

b.

negative NPV, should not be accepted

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Cash flows -90000 17000 17000 17000 17000 17000 17000 17000 17000 17000 Discount Rate 9.0% PV of cash flows -90000 15596.33 14308.56 13127.12 12043.23 11048.83 10136.54 9299.58 8531.73 7827.27 NPV 11919 IRR 2.9% Profitability index = pv of fufuture cash flows/initial investment 1.132

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