1. A manufacturer wants to introduce new factory equipment that requires machine
ID: 2731949 • Letter: 1
Question
1. A manufacturer wants to introduce new factory equipment that requires machinery to be purchased today for $120 million. This new machine will last for five years, and will be depreciated straight-line to a value of zero at the end of year five. The extra savings from the new machine are expected to produce project inflows of $47 million per year, beginning one year from today, for five consecutive years. The machine does carry extra costs such that project outflows will be $9 million per year, beginning one year from today, for five consecutive years. If the firm’s tax rate is 30% and the required rate of return is 10%, which of the following comes closest to the NPV of the new equipment project?
$8.13 million
$1.84 million
($1.12) million
$4.92 million
($3.96) million
2. Which of the following comes closest to the internal rate of return (IRR) of a project that requires an initial investment of $100 and produces a single cash flow of $160 at the end of year 8? The required rate of return for the project is 10%.
4.37%
4.81%
6.05%
3.99%
5.36%
a.$8.13 million
b.$1.84 million
c.($1.12) million
d.$4.92 million
e.($3.96) million
Explanation / Answer
1.
NPV=-120+(((47-9)*(1-30%))+24*30%)/1.10^1+(((47-9)*(1-30%))+24*30%)/1.10^2+(((47-9)*(1-30%))+24*30%)/1.10^3+(((47-9)*(1-30%))+24*30%)/1.10^4+(((47-9)*(1-30%))+24*30%)/1.10^5=$8.13 million
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