Question

​(Net present value​ calculation)  Big​ Steve's, makers of swizzle​ sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of ​$105 000 and will generate net cash inflows of ​$20 000 per year for 8 years.

a.  What is the​ project's NPV using a discount rate of 7 percent​? Should the project be​ accepted? Why or why​ not?

b.  What is the​ project's NPV using a discount rate of 17 ​percent? Should the project be​ accepted? Why or why​ not?

c.  What is this​ project's internal rate of​ return? Should the project be​ accepted? Why or why​ not?

Answer 1

Initial Investment = $105,000

From Year 1 to Year 8

Annual Cash flow = $20,000

a.

Discount Rate = 7%

NPV = $14,425.97

b.

NPV = -$20,856.75

c.

IRR is the rate at which NPV = 0,

So,

IRR = 10.44%