Question

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $56,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year Cash Flow
1 $23,000
2 23,000
3 25,000
4 28,000
5 16,000

Required:
a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return?

Answer 1

To calculate the net present value (NPV) and internal rate of return (IRR) for the new machine, use the formulas provided.

Step-by-step explanation:

The net present value of selecting a new machine:

To calculate the net present value (NPV), we need to discount each cash flow to its present value and subtract the initial investment. We can use the formula NPV = CF1/(1+r) + CF2/(1+r)^2 + ... + CFn/(1+r)^n - Initial Investment, where CF represents the cash flow in each year, r is the discount rate, and n is the number of years. Based on the given cash flows and a cost of capital of 10 percent, the NPV can be calculated.

The internal rate of return (IRR):

The internal rate of return (IRR) is the discount rate that equates the present value of the cash flows to the cost of the investment. In other words, it is the rate at which an investment breaks even. We can use a financial calculator or the IRR formula to calculate it.

Answer 2

Answer and Explanation:

The computation is shown below;

a. the net present value is

Year cash flow factor at 10% Discounted cash flows

0 -$56,000 1 $56,000

1 $23,000 0.9091 $20,909.09

2 $23,000 0.8264 $19,008.26

3 $25,000 0.7513 $18,782.87

4 $28,000 0.6830 $19,124.38

5 $16,000 0.6209 $9,934

Net present value $31,759.34

b. The internal rate of return is

Here we apply the formula

= IRR()

After this, the irr is 30.75%