Big Steves, maker of swizzle sticks, is considering the purchase of a new plasti

Question

Big Steves, maker of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90,000 and will generate net cash inflows of $21,000 per year for 9 years.

A) What is the projects NPV using a discount rate of 11%? Should the project be accepted? Why or Why not?
B) What is the projects NPV using a discount rate of 14%? Should the project be accepted? Why or why not?

C) What is the projects internal rate of return? Should the project be accepted? Why or why not?

If the project discount rate is 11% then the project NPV is ?______ (Round to the nearest Dollar)

Explanation / Answer

1)

NPV is the difference between present value of cash inflows and cash outflows.

NPV at discount rate of 11%:

=$21,000*present value annuity factor at 11% for 9 years-$90,000

=$21,000*5.53705-90,000

=116,278-90,000

=26,278

Since,NPV is positive; it is recommended to take the project.

2)

NPV at discount rate of 11%:

=$21,000*present value annuity factor at 14% for 9 years-$90,000

=$21,000*5.6889-90,000

=119,466-90,000

=29,466

Since, NPV is positive; it is recommended to take the project.

3)

Internal rate of return is the rate at which the NPV becomes zero.

It is computed as follows:

=90,000/21,000

=4.285 factor

Now, search the annuity factor in annuity table to determine the rate

It comes around 17%

Thus, IRR is 17%

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