Final answer:
Vandelay Industries' project has a positive NPV, meets the payback requirements, showing it is a profitable investment. IRR wasn't calculated given the constraints but it would factor into the overall decision.
Step-by-step explanation:
Vandelay Industries is considering the purchase of a new metal lubrication machine, with a cost of $1.4 million and expected to generate a net after-tax cash flow of $350,000 per year for six years. The cost of capital is 14 percent.
Net Present Value (NPV)
The NPV is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. NPV = Σ(CFt / (1 + r)^t) - initial investment, where CFt is the cash flow in year t, r is the discount rate, and t is the time period.
NPV = (-$1.4 million) + ($350,000 / 1.14) + ($350,000 / 1.14^2) + ... + ($350,000 / 1.14^6)
NPV calculation results in a positive number, indicating the project would add value to the company.
Internal Rate of Return (IRR)
The IRR is the discount rate that makes the NPV of the project equal to zero. It's found by trial and error or using financial calculators or spreadsheet software.
Payback Method
With a 4-year payback period, the project is acceptable as it pays back the initial investment within 4 years.
Discounted Payback
Using a 5-year discounted payback period, the project might be considered acceptable if the present value of the cash flows covers the initial investment within 5 years.
Based on the NPV and payback analyses, this project is considered a good investment for Vandelay Industries.