Question

The Pan American Botting Co. is considering the purchase of a new machine that would increase the speed of botting and save money. The net cost of this machine is $54,000. The annual cash flows have the following projections. Use Appendix Band Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods Year Cash Flow 22.000 25,000 28,000 14,000 7.000 a. If the cost of capital is 12 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.) b. What is the intemal rate of retum? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Should the project be accepled? Yes No

Answer 1

A	B	C	D	E
2			Discount Factor	12.00%
3	YEAR	CASH FLOW	PVAF@12%	PV of cash flow
4	0	-54000	1.000000	-54000.00
5	1	22000	0.892857	19642.86
6	2	25000	0.797194	19929.85
7	3	28000	0.711780	19929.85
8	4	14000	0.635518	8897.25
9	5	7000	0.567427	3971.99
A	NPV			18371.79
B	IRR	26.99%
C	ACCEPT IT
	PROJECT HAS POSITIVE NPV 18371.79 SO ACCEPT THE PROJECT

FORMULA:

A	B	C	D	E
2			Discount Factor	0.12
3	YEAR	CASH FLOW	PVAF@12%	PV of cash flow
4	0	-54000	=1/(1+$E$2)^B4	=C4*D4
5	1	22000	=1/(1+$E$2)^B5	=C5*D5
6	2	25000	=1/(1+$E$2)^B6	=C6*D6
7	3	28000	=1/(1+$E$2)^B7	=C7*D7
8	4	14000	=1/(1+$E$2)^B8	=C8*D8
9	5	7000	=1/(1+$E$2)^B9	=C9*D9
A	NPV			=SUM(E4:E9)
B	IRR	=IRR(C4:C9)