A new computer system will require an initial outlay of $24,000, but it will inc

Question

A new computer system will require an initial outlay of $24,000, but it will increase the firm’s cash flows by $4,800 a year for each of the next 6 years. a. Calculate the NPV and find out if the system worth installing if the required rate of return is 8%? What if it is 13%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Rate of Return NPV 8% $ 13% $ b. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Maximum discount rate %

Explanation / Answer

Net present value = Present value of cash inflows - Present value of cash outflows

When rate is 8%

= 4800*PVAF ( 8%, 6 years) - 24000

= 4800*4.62-24000

= 22176-24000 i.e 1824

When rate is 13%

= 4800*PVAF ( 13%, 6 years ) -24000

= 4800*4 -24000

= 19200-24000 i.e -4800

Maximum discount rate is the one at which the NPV is zero

0 = 4800*PVAF (x, 6 years ) -24000

24000 = 4800*PVAF ( x,6 years)

24000/4800 = PVAF ( X, 6 years)

5 = PVAF ( X, 6 years)

X = 0%

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