The Ohm Depot Co. is currently considering the purchase of a new machine that wo
ID: 2788318 • Letter: T
Question
The Ohm Depot Co. is currently considering the purchase of a new machine that would increase the speed of manufacturing electronic equipment and save money. The net cost of the new machine is $66,000. The annual cash flows have the following projections:
Year
Amount ($)
0
(66,000)
1
21,000
2
29,000
3
36,000
4
16,000
5
8,000
If the cost of capital is 10 percent, find the following:
a. The PVB
b. The NPV
c. The IRR
d. Payback
e. PI
Year
Amount ($)
0
(66,000)
1
21,000
2
29,000
3
36,000
4
16,000
5
8,000
Explanation / Answer
PVB = $86001
Requirement b:
Calculation of NPV (Net Present Value):
NPV
= PVB - Cost of machine
= $86001 - $66000
= $20001
NPV = $20001
Requirement c:
Calculation of IRR (Internal Rate of Return):
At IRR, PVB shall equal cost of machine
i.e., PVB = $66000
If discount rate = 22%, PVB = $66704.95
If discount rate = 23%, PVB = $65419.45
IRR = 22 + (66704.95-66000) / (66704.95 - 65419.45)
= 22 + (704.95 / 1285.5)
= 22 + 0.5483858
= 22.55
IRR = 22.55%
Requirement d:
Calculation of Payback:
Payback period is the period during which the cost of investment is earned.
Payback Period = Total Benefits / Cost of investment
= $110000 / 66000
= 1.6666
Payback = 1.67 years
Requirement e:
Calculation of PI (Profitability Index):
PI = PVB / Cost of investment
= $86001 / $66000
= 1.3
PI = 1.3
Requirement a: Calculation of PVB (Present Value of Benefits) Year Benefit PVF (10%) PV of Benefits 1 21000 0.909090909 19090.90909 2 29000 0.826446281 23966.94215 3 36000 0.751314801 27047.33283 4 16000 0.683013455 10928.21529 5 8000 0.620921323 4967.370584 86000.76994Related Questions
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