A firm can purchase new equipment for 16000.00 initial investment. The equipment

Question

A firm can purchase new equipment for 16000.00 initial investment. The equipment generates an annual after tax cash inflow of 7000.00 for 4 years. Assuming that the firm has a cost of capital of 14% 1. The NPV of the new equipment rounded to nearest cent is ..... 2 based on NPV is the new equines acceptable Answer yes or no 3. The maximum required rate of return the firm can have and still accept the new equipment is ....% ( round to two decimal places) A firm can purchase new equipment for 16000.00 initial investment. The equipment generates an annual after tax cash inflow of 7000.00 for 4 years. Assuming that the firm has a cost of capital of 14% 1. The NPV of the new equipment rounded to nearest cent is ..... 2 based on NPV is the new equines acceptable Answer yes or no 3. The maximum required rate of return the firm can have and still accept the new equipment is ....% ( round to two decimal places) 1. The NPV of the new equipment rounded to nearest cent is ..... 2 based on NPV is the new equines acceptable Answer yes or no 3. The maximum required rate of return the firm can have and still accept the new equipment is ....% ( round to two decimal places)

Explanation / Answer

Results may vary with your given answer based on discouting factor used. I have taken 4 digit factor for better accuracy Assuming the after Tax cash flow includes depreciation added back to net income here. Year 0 Year 1 Year 2 Year 3 Year 4 Initial Investment          (16,000) Annual Cash Inflow             7,000             7,000            7,000          7,000 Discounting Factor @14%                       1          0.8772           0.7695          0.6750       0.5921 PV of cash flows          (16,000)       6,140.35       5,386.27      4,724.80    4,144.56 NPV $     4,395.99 1 NPV is $4,395.99 2 Based on NPV equipment is acceptable. IRR Year 0 Year 1 Year 2 Year 3 Year 4 Initial Investment          (16,000) Annual Cash Inflow             7,000             7,000            7,000          7,000 Discounting Factor @26.855%                       1          0.7883           0.6214          0.4899       0.3862 PV of cash flows          (16,000)       5,518.11       4,349.94      3,429.06    2,703.13 NPV $             0.24 At required return rate of 26.855% , the NPV becomes 0. 3 So the equipmet is acceptable upto a maximum required return rate of 26.855%

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