17. The Boddie Group is also considering the purchase of a new machine that woul

Question

17. The Boddie Group is also considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $55,000. The annual cash flows have the following projections:

Year

Cash Flow

1

20000

2

29000

3

33000

4

18000

5

6000

a. If the cost of capital is n percent, what is the net present value of selecting a new machine (4 points)?

b. What is the internal rate of return (4 points)?

c. Should the project be accepted? Why (2 points)?

Year

Cash Flow

1

20000

2

29000

3

33000

4

18000

5

6000

Explanation / Answer

i have assumed cost of capital to be 10%

NPV = 61,491.67

b. IRR = 41.82%

c. Accept since IRR is greater than WACC

10.00% Cash flows Year Discounted CF            (55,000.00) 0 -55000.00              20,000.00 1 18181.82              29,000.00 2 23966.94              33,000.00 3 24793.39              18,000.00 4 12294.24              60,000.00 5 37255.28

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