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 $56,000. 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 $23,000
2 23,000
3 25,000
4 28,000
5 16,000

Required:
a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return?

Answer 1

Answer and Explanation:

The computation is shown below;

a. the net present value is

Year   cash flow        factor at 10%     Discounted cash flows

0         -$56,000         1                         $56,000

1           $23,000         0.9091               $20,909.09

2         $23,000          0.8264              $19,008.26

3         $25,000         0.7513                 $18,782.87

4         $28,000         0.6830               $19,124.38

5        $16,000          0.6209               $9,934

Net present value                               $31,759.34

b. The internal rate of return is

Here we apply the formula

= IRR()

After this, the irr is 30.75%