To expand the production capacity, you need new equipment for $16,230. Suppose y

Question

To expand the production capacity, you need new equipment for $16,230. Suppose you expect to generate a cash inflow of $2,500 per year for 12 years. What is the internal rate of return and what is your decision if the cost of capital is 10%? 11%, reject the project 10%, reject the project 11%, accept the project 10%, reject the project ROK corp. has the following investment opportunities: Under the payback method and assuming these machines are mutually exclusive, which machine(s) would ROK Corp. choose? Machine A Machine B No Machine taken Not enough information Which of the following statements is NOT correct statement? when NPV is positive, the IRR is greater than the cost of capital. NPV and IRR methods come up with the same conclusion for the most of times. when IRR is less than the cost of capital, the project is accepted. Positive NPV implies the cash inflow of the project is greater than the cash outflow of the project. A project requires an investment of $2,500 and has a net present value of $430. What is the profitability index for the project? 0.95 2.14 1.58 1.17

Explanation / Answer

21. IRR:
0 = -$16,230 + [($2,500)/(IRR)] + [($2,500)/(IRR)2] + [($2,500)/(IRR)3] + [($2,500)/(IRR)4] + [($2,500 )/(IRR)5] + [($2,500 )/(IRR)6] + [($2,500 )/(IRR)7] + [($2,500 )/(IRR)8] + [($2,500 )/(IRR)9] + [($2,500 )/(IRR)10] + [($2,500 )/(IRR)11] + [($2,500 )/(IRR)12] = 11%

As IRR is greater than cost of capital, accept the project.

22.Payback period of Machine A:
Amount recovered in 2 Years = $6,000 + $3,000 = $9,000
Amount to be recovered in Year 3 = $10,000 - $9,000 = $1,000
Payback Period = 2 + ($1,000/$3,000) = 2.33 Years

Payback period of Machine B:
In this project Cash inflow is equal to initial investment, which means the amount will be recovered at the end of machine’s life. So, the payback period will be 4 Years.

Payback period of Machine C:
Amount recovered in 3 Years = $0 + $30,000 + $5,000 = $35,000
Amount to be recovered in Year 3 = $35,500 - $35,000 = $500
Payback Period = 3 + ($500/$10,000) = 3.025 Years

Based on payback method, machine A will be selected as it has the shortest payback period.

23.c. When IRR is less than the cost of capital, the project is accepted.

24. Profitability Index = 1+ (NPV / Initial Investment) => 1 + ($430/$2,500) = 1 + 0.17 = 1.17

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