big steve\'s makers of swizzle tickets is considering the purchase of a new plas

Question

big steve's makers of swizzle tickets is considering the purchase of a new plastic stamping machine. this investment requires an initial outlay of $110,000 nd will generate net cash inflows of $16,000 per year for 8 yers.

a)what is the projected NPV using a discount rate of 9%? Should their project be accepted? Why or why not?

b)what is the projected NPV using a discount rate of 14%? Should their project be accepted? Why or why not?

c)what is the projects internal rate of return? Should their project be accepted? Why or why not?

Explanation / Answer

a). -$21442.89 No project should not accepted because NPV is negative

b). -$ 40502.55 No project should not accepted because NPV is negative

c). IRR=3.5%

The internal rate of return (IRR) on a project is the rate of return at which the projects NPV equals zero. At this point, a project's cash flows are equal to the project's costs. Similar to how management must establish a maximum payback period, management must also set what is known as a "hurdle rate", the minimum rate of return a company will accept for a project.
If IRR > hurdle rate, accept the project
If IRR< hurdle rate, reject the project

IRR is less so project should be rejected

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