Sunset Inc. is trying to determine if they should invest in a new machine that w

Question

Sunset Inc. is trying to determine if they should invest in a new machine that would be more efficient and would general an annual profit of $100,000 (after tax).

The following estimates are available:

Initial cost $279,800

Cost of capital 12%

Estimated life 4 years

Estimated residual value $ 0

Determine the net present value of the new machine (nearest answer if using a financial calculator or Excel).

A 24,310

B 23,930

C 19,509

D (36,816)

Determine the internal rate of return of the new machine (nearest answer if using a financial calculator or Excel).

A 12%

B 13%

C 14%

D above 15%

Explanation / Answer

B 23,930

d) Above 15%

Required annual profit       100,000 Year cashflow PV factor -12% 0    (279,800) 1 (279,800) 1 to 4 years       100,000 3.0373     303,730 NPV        23,930

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