The Pan American Bottling Co. is considering the purchase of a new machine that
ID: 2653225 • Letter: T
Question
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $51,000. The annual cash flows have the following projections: Use Appendix B and Appendix D.
If the cost of capital is 10 percent, what is the net present value of selecting a new machine? (Round "PV Factor" to 3 decimal places. Round all dollar values to the nearest dollar amount. Omit the "$" sign in your response.)
What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round all dollar values to the nearest dollar amount. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $51,000. The annual cash flows have the following projections: Use Appendix B and Appendix D.
Explanation / Answer
(a)If the cost of capital is 10 percent, what is the net present value of selecting a new machine? (Round "PV Factor" to 3 decimal places. Round all dollar values to the nearest dollar amount. Omit the "$" sign in your response.)
Net present value = -51000 + 15600*PVIF(10%,1) + 20600*PVIF(10%,2) + 25600*PVIF(10%,3) + 10600*PVIF(10%,4) + 5600*PVIF(10%,5)
Net present value = -51000 + 15600*0.909 + 20600*0.826 + 25600*0.751 + 10600*0.683+ 5600*0.621
Net present value = 10139
Answer
Net present value $ 10,139
(b)
What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round all dollar values to the nearest dollar amount. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Internal rate of return is the rate at which NPV is equal to zero
Calculating IRR on Trial Run Basis
Using Cost of Capital 15%
Net present value = -51000 + 15600*PVIF(15%,1) + 20600*PVIF(15%,2) + 25600*PVIF(15%,3) + 10600*PVIF(15%,4) + 5600*PVIF(15%,5)
Net present value = -51000 + 15600*0.870 + 20600*0.756 + 25600*0.658 + 10600*0.572+ 5600*0.497
Net present value = 3836.80
Using Cost of Capital 20%
Net present value = -51000 + 15600*PVIF(20%,1) + 20600*PVIF(20%,2) + 25600*PVIF(20%,3) + 10600*PVIF(20%,4) + 5600*PVIF(20%,5)
Net present value = -51000 + 15600*0.833 + 20600*0.694 + 25600*0.579 + 10600*0.482+ 5600*0.402
Net present value = -1526
Using Interpolation
(IRR - 15%)/(20%-15%) = (0-3836.80)/(-1526-3836.80)
IRR-15% = 0.71*5%
IRR = 15 + 3.55
IRR = 18.55%
While it may vary as its intermediary calculation is rounded, if we calculate direcly using excel formula
IRR = irr({-51000,15600,20600,25600,10600,5600})
IRR = 18.49%
Answer
Internal rate of return 18.49%
(c) Should the project be accepted?
Answer
Yes
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.