A new computer system will require an initial outlay of $21,000, but it will inc
ID: 2742798 • Letter: A
Question
A new computer system will require an initial outlay of $21,000, but it will increase the firm’s cash flows by $4,200 a year for each of the next 6 years. a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 8%. What if it is 13%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Rate of Return NPV Worth Installing 8% $ -1,697.04 13% $ b. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Maximum discount rate
Explanation / Answer
Part A
To compute Net Present Value, we need to add PV of all cash flows. To compute Present value,
NPV at 8%
Year
Cash flow
PV factor 8%
PV
0
-21000
1
-21000
1
4200
0.925926
3888.889
2
4200
0.857339
3600.823
3
4200
0.793832
3334.095
4
4200
0.73503
3087.125
5
4200
0.680583
2858.449
6
4200
0.63017
2646.712
NPV
-1583.91
So NPV would be -1583.91.
NPV at 13%
Year
Cash flow
PV factor 13%
PV
0
-21000
1
-21000
1
4200
0.884956
3716.814
2
4200
0.783147
3289.216
3
4200
0.69305
2910.811
4
4200
0.613319
2575.939
5
4200
0.54276
2279.592
6
4200
0.480319
2017.338
NPV
-4210.29
So NPV would be -4210.29
Part B
Here we need to compute IRR:
IRR can be calculated using IRR function in excel:
= IRR( cash flows)
IRR= 5.47%
Therefore, highest discount rate before which we will reject the project would be 5.47%.
Year
Cash flow
PV factor 8%
PV
0
-21000
1
-21000
1
4200
0.925926
3888.889
2
4200
0.857339
3600.823
3
4200
0.793832
3334.095
4
4200
0.73503
3087.125
5
4200
0.680583
2858.449
6
4200
0.63017
2646.712
NPV
-1583.91
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