Question 2: (30 points). (Net present value calculation) Big Steve\'s, makers of
ID: 2721843 • Letter: Q
Question
Question 2: (30 points). (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 $19,000 per year for 11 years.
To answer Choose an item questions, click on the orange text and use the pull down menu to select the best answer.
a. What is the project's NPV using a discount rate of 7 percent? (Round to the nearest dollar.) If the discount rate is 7 percent, then the project's NPV is: $ Should the project be accepted? The project Choose an item. accepted because the NPV is Choose an item. and therefore Choose an item. value to the firm.
b. What is the project's NPV using a discount rate of 16 percent? If the discount rate is 16 percent, then the project's NPV is: $ Should the project be accepted? The project Choose an item. accepted because the NPV is Choose an item. and therefore Choose an item. value to the firm. If the project's required discount rate is 16%, then the project Choose an item. accepted because the IRR is Choose an item. Than the required discount rate.
c. What is this project's internal rate of return? (Round to two decimal places.) This project's internal rate of return is: % Should the project be accepted? Why or why not? If the project's required discount rate is 7%, then the project Choose an item. accepted because the IRR is Choose an item. the required discount rate. If the project's required discount rate is 16%, then the project Choose an item. accepted because the IRR is Choose an item. the required discount rate.
Explanation / Answer
Answer:
a. NPV = - $ 90,000
= $ 19,000 (7.499) - $ 90,000
= $ 142,475 - $ 90,000
= $ 52,475
NPV of project is $ 142,475, it is excess by $ 52,475 over cost of project $ 90,000.
So, Project should be accepted.
Years
Cash Inflows
i=7%
Cash inflows with discount
1
$ 19,000
0.93
$ 17,757
2
$ 19,000
0.87
$ 16,595
3
$ 19,000
0.82
$ 15,510
4
$ 19,000
0.76
$ 14,495
5
$ 19,000
0.71
$ 13,547
6
$ 19,000
0.67
$ 12,661
7
$ 19,000
0.62
$ 11,832
8
$ 19,000
0.58
$ 11,058
9
$ 19,000
0.54
$ 10,335
10
$ 19,000
0.51
$ 9,659
11
$ 19,000
0.48
$ 9,027
Total
$ 209,000
7.499
$ 142,475
Cash Outflows
$ 90,000
$ 52,475
b. NPV = - $ 90,000
= $ 19,000 (5.029) - $ 90,000
= $ 95,551 - $ 90,000
= $ 5,551
If the discount rate is 16 percent, then the project's NPV is $ 95,551.
Yet NPV of project > cost of project. So, Project should be accepted.
Years
Cash Inflows
i=16%
Cash inflows with discount
1
$ 19,000
0.86
$ 16,379
2
$ 19,000
0.74
$ 14,120
3
$ 19,000
0.64
$ 12,172
4
$ 19,000
0.55
$ 10,494
5
$ 19,000
0.48
$ 9,046
6
$ 19,000
0.41
$ 7,798
7
$ 19,000
0.35
$ 6,723
8
$ 19,000
0.31
$ 5,795
9
$ 19,000
0.26
$ 4,996
10
$ 19,000
0.23
$ 4,307
11
$ 19,000
0.20
$ 3,713
Total
$ 209,000
5.029
$ 95,544
Cash Outflows
$ 90,000
$ 5,544
c. $ 90,000 = $ 19,000 [PVIFAIRR%,11 yrs.]
IRR = Between 17% and 18% (17.56%)
$ 95,544 - $ 90,000
IRR = 16 + -------------------------- x 2
$ 95,544 - $ 88,464
= 16+1.56
= 17.56 %
PVco = Present value of cash outlay = $ 90,000
PVcfat = Present value of cash inflow (DFr x Annuity) = $ 95,544
r = Either of two interest rates used in the formula = 16
r = Difference in interest rates = 18-16 = 2
PV = Difference in present values of inflow = $95,554-$88,464 = $ 7,080
Years
Cash Inflows
i=16%
Cash inflows with discount
i=18%
Cash inflows with discount
1
$ 19,000
0.86
$ 16,379
0.85
$ 16,102
2
$ 19,000
0.74
$ 14,120
0.72
$ 13,646
3
$ 19,000
0.64
$ 12,172
0.61
$ 11,564
4
$ 19,000
0.55
$ 10,494
0.52
$ 9,800
5
$ 19,000
0.48
$ 9,046
0.44
$ 8,305
6
$ 19,000
0.41
$ 7,798
0.37
$ 7,038
7
$ 19,000
0.35
$ 6,723
0.31
$ 5,965
8
$ 19,000
0.31
$ 5,795
0.27
$ 5,055
9
$ 19,000
0.26
$ 4,996
0.23
$ 4,284
10
$ 19,000
0.23
$ 4,307
0.19
$ 3,630
11
$ 19,000
0.20
$ 3,713
0.16
$ 3,076
Total
$ 209,000
5.029
$ 95,544
4.656
$ 88,464
Cash Outflows
$ 90,000
$ 90,000
$ 5,544
$ (1,536)
Years
Cash Inflows
i=7%
Cash inflows with discount
1
$ 19,000
0.93
$ 17,757
2
$ 19,000
0.87
$ 16,595
3
$ 19,000
0.82
$ 15,510
4
$ 19,000
0.76
$ 14,495
5
$ 19,000
0.71
$ 13,547
6
$ 19,000
0.67
$ 12,661
7
$ 19,000
0.62
$ 11,832
8
$ 19,000
0.58
$ 11,058
9
$ 19,000
0.54
$ 10,335
10
$ 19,000
0.51
$ 9,659
11
$ 19,000
0.48
$ 9,027
Total
$ 209,000
7.499
$ 142,475
Cash Outflows
$ 90,000
$ 52,475
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