Question

A company is considering purchasing a new second machine in order to expand their business. The information for the new machine is:

Cost= $100,000

Increase in contribution margin= $25,000

Life of the machine= 5 years

Required rate of return = 10%

Calculate the following:

a. Net present value (NPV) (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar)

b. Payback period (Round your answer to two decimal places.)

c. Discounted payback period (Round interim calculations to the nearest whole dollar. Round the rate to two decimal places, X.XX%.)

d. Internal rate of return (Round the rate to two decimal places, X.XX%.)

e. Accrual accounting rate of return based on net initial investment (Round interim calculations to the nearest whole dollar. Round the rate to two decimal places, X.XX%.

Answer 1

Calculation of NPV and IRR

NPV = $ -5,233 rounded off.

Payback period = Initial Investment / Annual cash flow
= $100,000 / $25,000
= 4 years

Discounted Payback Period will be more than 5 years becuase as we can see total present value of cash inflows from Year 1 to Year 5 is less than the cash outflow of Year 0 hence discounted payback period will exceed the 5 years life and hence cannot be calculated beyond that as no cash flow information is given also machinery will not work after 5 years.

IRR = 7.93%, here IRR is calculated using the excel formula of IRR.

Accounting rate of return = Annual Incremental Contribution / Initial Investment
= $25,000 / $100,000
= 25%