(Net present value calculation) Big Steve’s, makers of swizzle sticks, is consid
ID: 2655571 • 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 $100,000 and will generate net cash inflows of $18,000 per year for
10 years.
a. What is the project’s NPV using a discount rate of 10 percent? Should the project be
accepted? Why or why not?
b. What is the project’s NPV using a discount rate of 15 percent? Should the project be
accepted? Why or why not?
c. What is this project’s internal rate of return? Should the project be accepted? Why or
why not?
Explanation / Answer
Year Cash flows PV@10% PV@15% 0 $ -100,000.00 $ -100,000.00 $ -100,000.00 1 $ 18,000.00 $ 16,363.64 $ 15,652.17 2 $ 18,000.00 $ 14,876.03 $ 13,610.59 3 $ 18,000.00 $ 13,523.67 $ 11,835.29 4 $ 18,000.00 $ 12,294.24 $ 10,291.56 5 $ 18,000.00 $ 11,176.58 $ 8,949.18 6 $ 18,000.00 $ 10,160.53 $ 7,781.90 7 $ 18,000.00 $ 9,236.85 $ 6,766.87 8 $ 18,000.00 $ 8,397.13 $ 5,884.23 9 $ 18,000.00 $ 7,633.76 $ 5,116.72 10 $ 18,000.00 $ 6,939.78 $ 4,449.32 NPV @10% = $ 10,602.21 NPV @15% = $ -9,662.16 IRR = 12.41% 3. The project is accepted under part (a) i.e. if the cash flows are discounted @ 10%.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.