The Pan American Bottling Co. is considering the purchase of a new machine that

Question

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $48,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow 1 $ 18,000 2 22,000 3 25,000 4 12,000 5 7,000 a. If the cost of capital is 9 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Net present value $ b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal rate of return % c. Should the project be accepted? Yes No

Explanation / Answer

a.

b.

NPV at 25% =$489

NPV at 30% =-$3,670

Difference in rate=-5%

Difference in NPV=$4,159

internal rate of return=25%-$489*(-5%)/$4,159=25%+0.59%=25.59%

NPV of the project @9% Year Cash flow PV@9% PV 0 -48000       1.0000 -48,000 1 18000       0.9174    16,514 2 22000       0.8417    18,517 3 25000       0.7722    19,305 4 12000       0.7084      8,501 5 7000       0.6499      4,550 NPV    19,386

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