Big Steve\'s makers of swizzle sticks, is considering the purchase of a new plas

Question

Big Steve's makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $110,000 and will generate net cash inflows of $17,000 for 9 years.

a.) What is the project's NPV using a discount rate of 8%? Should this project be accepted? Is the NPV positive or negative?

b.) What is the projects NPV using a discount rate of 14%? Should this project be accepted? Is the NPV positive or negative?

c.) What is the projects internal rate of return? _______

1.) If the project's required discount rate is 8% should the project be accepted? Is the IRR Higher/Lower than the discount rate?

2.) If the project's required discount rate is 14% should the project be accepted? Is the IRR Higher/Lower than the discount rate?

Explanation / Answer

A. Npv = Present value of cash inflows - present value of inflows

= 17000 pvaf( 1/1.08)9 - 110000

=106197 - 110000

= - $3803

Npv is negative hence project should not be accepted.

B. At rate of 14% ,

Npv = 17000 × 4.946 - 110000

= - $ 25917

It is also negative , hence project should not be accepted.

C. IRR

= lower rate + NPV at lower rate (difference in rates)

(Npv at lower rate - Npv at higher rate )

= 8 + (- 3803) × (14 - 8)

- 3803 -(- 25917)

= 8 - 1.03

=6.97%

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