Question 2: (30 points). (Net present value calculation) Big Steve\'s, makers of

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Question 2: (30 points). (Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90,000 and will generate net cash inflows of $19,000 per year for 11 years. To answer Choose an item questions, click on the orange text and use the pull down menu to select the best answer.

a. What is the project's NPV using a discount rate of 7 percent? (Round to the nearest dollar.) If the discount rate is 7 percent, then the project's NPV is: $ Should the project be accepted? The project Choose an item. accepted because the NPV is Choose an item. and therefore Choose an item. value to the firm.

b. What is the project's NPV using a discount rate of 16 percent? If the discount rate is 16 percent, then the project's NPV is: $ Should the project be accepted? Why or why not?

c. What is this project's internal rate of return? (Round to two decimal places.) This project's internal rate of return is: % Should the project be accepted? Why or why not? If the project's required discount rate is 7%, then the project Choose an item. accepted because the IRR is Choose an item. the required discount rate. If the project's required discount rate is 16%, then the project Choose an item. accepted because the IRR is Choose an item. the required discount rate.

Explanation / Answer

a. CALCULATION OF NPV IF THE DISCOUNT RATE IS 7%

___________________________________________________________________________________________

YEAR                                                   CASH INFLOW                     ANNUITY FACTOR @7%        DCI                   

1 TO 11 YEARS                                     $19,000                                     7.4987                               142,475

LESS: INITIAL INVESTMENT                                                                                                              90,000

DECISION: IF THE PROJECT DISCOUNT RATE IS 7%, PROJECT IRR IS 17.66%, SO THE PROJECT IRR IS MORE THAN ITS DISCOUNT RATE, HENCE, PROJECT WILL BE ACCEPTED

IF THE PROJECT DISCOUNT RATE IS 16%, ITS IRR IS 17.66, SO THE PROJECT IRR IS GREATER THAN ITS DISCOUNT RATE,HENCE, THE PROJECT WILL BE ACCEPTED

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