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

Question

A new computer system will require an initial outlay of $24,000, but will increase the firm's cash flows by $4,800 a year for each of the next 6 years.

a. Calculate the NPV and decide if the system is 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 calcualtions. Round your answers to 2 decimal places.)

rate of return            NPV           Worth installing (yes or no)

    8%                    $______        _______

13%                   $______        ________

b. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal placces.)

maximum discount rate __________________%

Explanation / Answer

a

NPV8% => $24000 + [$4800 * Annuity factor (8%, 6 )]

=> -24000 + 4800 * 4.623

=> -24000 + 22190.4

NPV @ 8%=> - $1809.6

NPV13% => $24000 + [$4800 * Annuity factor (13%,6)]

=> -24000 + 4800 * 3.998

=> -24000 + 19190.4

NPV @ 13%=> - $4809.6

Answer b

IRR is the discounting rate we need to calculate first

PV = ()24000 ; PMT = 4800; FV = 0 ; n =6, and i =?

So, i => 5.47%

5.47% is the discount rate above which every project would be rejected, as happens in above cases.

Maximum discount rate => 5.47%

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