A new computer system will require an initial outlay of $23,500, but it will inc

Question

A new computer system will require an initial outlay of $23,500, but it will increase the firm’s cash flows by $4,700 a year for each of the next 7 years.

a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 15%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. 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.)

Explanation / Answer

Rate of Return NPV Worth Installing 10.00% -$618.43 no 15.00% -$3,946.03 no a) Year Cashflow PV @ 10% Present Value 0 -$23,500 1.0000 -$23,500 1 $4,700 0.9091 $4,272.73 2 $4,700 0.8264 $3,884.3 3 $4,700 0.7513 $3,531.18 4 $4,700 0.6830 $3,210.16 5 $4,700 0.6209 $2,918.33 6 $4,700 0.5645 $2,653.03 7 $4,700 0.5132 $2,411.84 NPV -$618.43 b) Year Cashflow PV @ 15% Present Value 0 -$23,500 1.0000 -$23,500 1 $4,700 0.8696 $4,086.96 2 $4,700 0.7561 $3,553.88 3 $4,700 0.6575 $3,090.33 4 $4,700 0.5718 $2,687.24 5 $4,700 0.4972 $2,336.73 6 $4,700 0.4323 $2,031.94 7 $4,700 0.3759 $1,766.9 NPV -$3,946.03 c) Year Cashflow 0 -$23,500 1 $4,700 2 $4,700 3 $4,700 4 $4,700 5 $4,700 6 $4,700 7 $4,700 IRR 9.20% Maximum discount rate 9.20%

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