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Pan bottling co is considering purchasing a new machine to increase the speed of

ID: 2723410 • Letter: P

Question

Pan bottling co is considering purchasing a new machine to increase the speed of bottling and save money. The net cost of the machine is $60,000. The annual cash flows have the following projections:

Year 1 cash flow $23,000

Year 2 cash flow $26,000

Year 3 cash flow $29,000

Year 4 cash flow $15,000

Year 5 cash flow $8,000

A. If the cost of capital is 13%, what is the net present value of selecting a new machine?

B. What is the internal rate of return? Please show work

C. Should the project be accepted and why?

Explanation / Answer

A.

NPV=-60000+23000/1.13^1+26000/1.13^2+29000/1.13^3+15000/1.13^4+8000/1.13^5=14356.11

IRR use excel

IRR= IRR(range of cash flow values)

= 23.77%

yes accept project as NPV is positive and IRR>WACC