13. The Tool Box needs to purchase a new machine costing $1.46 million. Manageme

Question

13. The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the three years. If management requires a minimum 12 percent rate of return, purchase this particular machine? Why or why not? following should the fim a. Yes; because the IRR is 12.74 percent b. Yes; because the IRR is 10.75 percent C. No; because the IRR is 10.75 percent d. No; because the IRR is 12.74 percent answer cannot be determined as there are multiple IRRs 14, What is the NPV of the following set of cash flows if the required return is 14%? Year Cash Flow I .450,000-1- -5000 50,000 25,000 a. It is negative b. 3,034 c. 9,525 d. 10,376 e $41,410 As director of capital budgeting you are responsible for making investment decisions that are in shareholder's best interest. You are evaluating the following three mutually exclusive investments. Based on the following information which project should you choose. (Assume COC= 1096) 15. Project Payback IRR NPV 2 years 11% 3 years 12% $1500 4 years 13% $1000 $500 a. Project A b. Project B c. Project C d. Need more information

Explanation / Answer

13)

IRR is the rate at which NPV is zero

=>

-1460000 + 223000/(1+IRR) + 600000/(1+IRR)^2 + 600000/(1+IRR)^3 + 600000/(1+IRR)^4 =0

=>

IRR = 12.74%

hence choose a)

14)

NPV = -50000 - 5000/1.14 + 50000/1.14^2 + 50000/1.14^3 - 25000/1.14^4

= 3033.98

= 3034

hence choose b)

15)

choose project B ,since its IRR > COC and NPV is highest

hence choose b)

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