A firm can purchase a fixed asset for a $13,000 initial investment. The asset ge

Question

A firm can purchase a fixed asset for a $13,000 initial investment. The asset generates an annual after-tax cash inflow of $4,000 for 4 years.

a. Determine the net present value (NPV) of the asset, assuming that the firm has a 10% cost of capital. Is the project acceptable?

b. Determine the maximum required rate of return (closest whole-percentage rate) that the firm can have and still accept the asset. Discuss this finding in light of your repsonse in part a.

**FOR FULL POINTS YOU MUST SHOW YOUR WORK(IF NEEDED)**

Explanation / Answer

a) NPV = -13000 + 4000/1.1 + 4000/1.1^2 + 4000/1.1^3 + 4000/1.1^4 = -320.538

project is not acceptable since NPV is negative

b) 0 = -13000 + 4000/(1+IRR) + 4000/(1+IRR)^2 + 4000/(1+IRR)^3 + 4000/(1+IRR)^4

= 8.86%

= 9% (approx)

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