(net present value calculation) Big Steve\'s, makers of swizzle sticks, is consi
ID: 2647078 • Letter: #
Question
(net present value calculation) Big Steve's, makers 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 $19000 per year for 9 years.
a what is the projects NPV using a discount rate of 7%? Should the project be accepted? Why or why not
b. What is the projects NPV using the 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
Explanation / Answer
The net present value of a project is the present value of cash inflows minus present value of cash outflows.
a. Discount rate = 7%
Present value of cash outflow = $90,000
Present value of cash inflows : Using financial calculator, enter N = 9, I = 0.07, PMT = 19,000 and press Pv key. The answer will come out to be 123,789.43.
Net present value = Pv cash inflow - PV of cash outflow
= $123,789.43. - $90,000 = $33,789.43
Since, the project have positive net present value so the projecy will be accepted.
b.
Discount rate = 14%
Present value of cash outflow = $90,000
Present value of cash inflows : Using financial calculator, enter N = 9, I = 0.14, PMT = 19,000 and press Pv key. The answer will come out to be 93,981.06.
Net present value = Pv cash inflow - PV of cash outflow
= $93,981.06. - $90,000 = $3,981.09
Since, the project have positive net present value so the projecy will be accepted.
c.
The internal rate of return is the return on zero NPV.
Using financial calculator, Enter N = 9, PMT = 19000, PV = -90000 and press I/Yr key, The answer will be 15.21%
The IRR of the project is 15.21% which is more than the firms required rate of return i.e 7% or 14%, hence the project should be accepted.
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