A new computer system will require an initial outlay of $15,000, but it will inc

Question

A new computer system will require an initial outlay of $15,000, but it will increase the firm’s cash flows by $3,000 a year for each of the next 6 years.

a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 8%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 13%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) maximum discount rate %

Explanation / Answer

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A B C D E F G 1 Year 0 1 2 3 4 5 6 2 Initial Cash outley -15000 3 Increase in cash flows 3000 3000 3000 3000 3000 3000 4 Free Cash Flow -15000 3000 3000 3000 3000 3000 3000 5 Required Rate of return 8% a) NPV -1131.36 NPV(A5,B4:G4) Using NPV excel Function No the computer system is not worth installing because NPV is negative Required Rate of return 13% b) NPV -3007.35 NPV(13%,B4:G4) No the computer system is not worth installing because NPV is negative c) Highest discount rate is the IRR of the project where NPV =0 IRR 5.47% IRR(A4:G4) Highest Discount rate is 5.47%

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