Exercise 13-9 Basic Net Present
Value and Internal Rate of Return Analysis [LO1, LO2]
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Consider each case below
independently. (Ignore income taxes.)
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Click here to view Exhibit 13B-1
and Exhibit 13B-2,
to determine the appropriate discount factor(s) using tables.
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Required:
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1a.
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Minden
Company’s required rate of return is 15%. The company can purchase a new
machine at a cost of $40,350. The new machine would generate cash inflows of
$15,000 per year and have a four-year life with no salvage value. Compute the
machine’s net present value. (Negative amount
should be indicated by a minus sign. Round discount factor(s) to 3
decimal places, intermediate and final answers to the nearest dollar amount.
Omit the "$" sign in your response.)
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Net present value
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$
2,475
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1b.
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Is the machine an acceptable
investment?
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Yes
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2.
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Leven
Products, Inc., is investigating the purchase of a new grinding machine that
has a projected life of 15 years. It is estimated that the machine will save
$20,000 per year in cash operating costs. What is the machine’s internal rate
of return if it costs $111,500 new? (Round
discount factor(s) to 3 decimal places and final answer to the closest
interest rate. Omit the "%" sign in your response.)
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Internal rate of
return
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16
% |
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3a.
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Sunset
Press has just purchased a new trimming machine that cost $14,125. The
machine is expected to save $2,500 per year in cash operating costs and to
have a 10-year life. Compute the machine’s internal rate of return. (Round discount factor(s) to 3 decimal places and final
answer to the closest interest rate. Omit the "%" sign in your
response.)
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Internal rate of
return
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12
% |
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3b.
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If the company’s required rate of
return is 16%, did it make a wise investment?
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No
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