Big Steves, maker of swizzle sticks, is considering the purchase of a new plasti
ID: 2630799 • Letter: B
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 $16,000 per year for 8 years. A) What is the projects NPV using a discount rate of 9%? Should the project be accepted? Why or why not? B) What is the projects NPV using a discount rate of 17%? 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?
Explanation / Answer
Hi Folk, Hope you are doing good.
Before directly moving for solution lets understand the concept behind it first.
See, the Maximum amount one could invest in project should be either equal to or more than Present Value of Benefits derived from Project. If Initial Investment is more than Present value of Benefits derived from Project then We will be in Loss. The Difference between Initial Investment and Present Value of benefits is called NET PRESENT VALUE (NPV).
Now We can Move for Solution.
Year
Cash Inflows
Present Value @9%
Present Value @17%
0
($90,000)
($90,000)
($90,000)
1
$16,000
$14,678.90
$12,546.07
2
$16,000
$13,466.88
$9,837.74
3
$16,000
$12,354.94
$7,714.06
4
$16,000
$11,334.80
$6,048.82
5
$16,000
$10,398.90
$4,743.06
6
$16,000
$9,540.28
$3,719.17
7
$16,000
$8,752.55
$2,916.31
8
$16,000
$8,029.86
$2,286.76
Net Present Value (NPV)
-$1,442.89
-$40,188.02
Regards,
George
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Year
Cash Inflows
Present Value @9%
Present Value @17%
0
($90,000)
($90,000)
($90,000)
1
$16,000
$14,678.90
$12,546.07
2
$16,000
$13,466.88
$9,837.74
3
$16,000
$12,354.94
$7,714.06
4
$16,000
$11,334.80
$6,048.82
5
$16,000
$10,398.90
$4,743.06
6
$16,000
$9,540.28
$3,719.17
7
$16,000
$8,752.55
$2,916.31
8
$16,000
$8,029.86
$2,286.76
Net Present Value (NPV)
-$1,442.89
-$40,188.02
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