Question

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $72,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow 1 $ 29,000 2 33,000 3 35,000 4 21,000 5 18,000 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.) Net present value $ b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Internal rate of return % c. Should the project be accepted?

Answer 1

Answer:

IRR= R1+[NPV1(R2-R1)%/(NPV1-NPV2)]

      =28%+[ 549 x (29-28)%/(549-(-763)]

       =28% +[5.49/1312]

         =28% +0.418

          =28.41%

As per both NPV and IRR the project is acceptable

Reason:

NPV is positive and IRR is greater than cost of capital

Explanation:

See the attached pictures for detailed explanation.