Exercise 19.9 (Algorithmic) NPV and IRR Each of the following scenarios is indep

Question

Exercise 19.9 (Algorithmic)
NPV and IRR

Each of the following scenarios is independent. All cash flows are after-tax cash flows.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be $835,000 per year. The system costs $6,766,000 and will last twelve years. Compute the NPV assuming a discount rate of 6 percent.
$

Should the company buy the new system?
- Select your answer -YesNoItem 2

2. Sterling Wetzel has just invested $229,000 in a restaurant specializing in German food. He expects to receive $39,847 per year for the next eight years. His cost of capital is 7.30 percent. Compute the internal rate of return. Round your answers to whole percentage value (for example, 16% should be entered as "16" in the answer box).
%

Did Sterling make a good decision?
- Select your answer -YesNoItem 4

Explanation / Answer

Answer:1

Yes, company should buy the equipment because NPV is positive.

Answer:2

Yes, IRR is higher than cost of capital.

Discount rate 6% Year Cash Flows($) 0 -6766000 1 835000 2 835000 3 835000 4 835000 5 835000 6 835000 7 835000 8 835000 9 835000 10 835000 11 835000 12 835000 NPV 234509.69

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