Question

NPV and IRR Each of the following scenarios is independent. All cash flows are after-tax cash flows. The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be $718,000 per year. The system costs $3,897,000 and will last eight years. Compute the NPV assuming a discount rate of 8 percent. Should the company buy the new system? Yes 2. Sterling Wetzel has just invested $219,500 in a restaurant specializing in German food. He expects to receive $57,900 per year for the next five years. His cost of capital is 9.50 percent. Compute the internal rate of return. Round your answers to whole percentage value (for example, 16% should be entered as "16" in the answer box). Did Sterling make a good decision? Yes ✓

Answer 1

1) Computation of NPV:

В C D Calculation of Net Present Value Discount Factor Year Cash Flows 2 Present Value @8% 1 -1/(1+8%)^1 =1/(1+8%)^2 =1/( 1+8%)^3 =1/(1+8%)^4 =1/( 1+8%)^5 1/ (1+8%) 6 =1/(1+8%)^7 =1/( 1+8%)^8 -3897000 718000 718000 718000 718000 718000 718000 718000 718000 =B3*C3 -B4*C4 -B5*C5 -B6*C6 -B7*C7 -B8*C8 -B9*C9 =B10*C10 =B11C11 SUM(D3:D11) 3 0 4 1 5 2 6 3 7 4 8 5 9 6 10 7 11 8 Net Present Value 12

Results of the excel sheet are as follows:

A В C Calculation of Net Present Value Discount Factor 1 Cash Present Year Flows @ 8% Value 2 1 ($3,897,000) $664,815 0-3897000 3 1 718000 0.9259 $615,569 2 718000 0.8573 5 $569,972 3 718000 0.7938 6 $527,751 $488,659 718000 0.7350 5 718000 0.6806 $452,462 $418,946 6 718000 0.6302 9 7 718000 0.5835 10 718000 8 0.5403 $387,913 11 Net Present Value $229,087 12 4 7

Thus, the net present value is $229,087.

2) Computation of IRR:

А В Calculation of IRR 14 Year 15 Cash Flows -219500 16 0 57900 57900 57900 57900 57900 22 IRRIRR(B16:B21) 17 1 18 2 19 3 20 4 21 5

Results of the excel sheet are as follows:

A Calculation of IRR 14 Cash Year Flows 15 0219500 57900 16 1 17 2 57900 18 57900 19 4 57900 20 5 57900 21 10% 22 IRR

Thus, IRR is 10%.