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

Question

(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 $95,000 and will generate net cash inflows of $20,000 per year for 88 years.

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

b.What is the project's NPV using a discount rate of 14percent? 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?

Explanation / Answer

Ans.:)

I) Bit Answer

The project should be accepted because it has a positive Net present value

II) Bit Answer

III)Bit answer

The project should be accepted only when cost of capital is below than IRR (i.e 21.37%) because we will gain only after meeting the cost.

Note :

The IRR, is the discount rate that causes the net present value of future cash flows from an investment to equal zero.

Net present value = Present value of cash inflows - present value of cash outflows Net present value = (Present value annuity factor for 88 years @ 9% * cash inflows) - present value of cash outflows Net present value = (11.10546 * 20000) - 95000 Net present value = 222109 - 95000 =127109

The project should be accepted because it has a positive Net present value

II) Bit Answer

Net present value = Present value of cash inflows - present value of cash outflows Net present value = (Present value annuity factor for 88 years @ 14% * cash inflows) - present value of cash outflows Net present value = (7.142787 * 20000) - 95000 Net present value = 142855 - 95000 =47855 The project should be accepted because it has a positive Net present value

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