Meche X C Secure l https://oregonstate.in 1648905/quizzes/2397523/take Carson is

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Meche X C Secure l https://oregonstate.in 1648905/quizzes/2397523/take Carson is the manufacturing supervisor for Candy Crunch, Limited. Carson purchased a candy wrapping machine for $350,000 to save on labor costs. The first year, the machine worked well and the company was able to save $200,000, with machine operating and maintenance expenses of $100,000. The second year, operating expenses were slightly higher at $150,000, but savings increased to $300,000. The third year, expenses increased again to $175,000, but savings maintained at $300,000. The fourth year, the machine began to experience some problems and broke down quite a bit. Expenses were $190,000 and savings decreased to $200,000. By the fifth year, the machine breakdowns were becoming more costly and it was apparent the machine would not last another year. The company spent $225,000 on operating and maintenance costs with savings of $200,000. The company sold the machine for scrap at the end of year 5 for $30,000 State What is the actual IRR for this purchase? Calculate your answer to the nearest 0.10. (Hint: If using Excel, format the answer for 2 decimal places.) Enter your answer as 1.23. Do not use a percent ("%") sign. For example, if you calculate an IRR of 13.54%. enter it as 13.54 Help D Question 2 0.35 pts Using a 7% MARR, calculate the actual present worth of the candy wrapping machine. Enter your answer as 12345 Round your answer. Do not use a dollar sign ("$"), any commas("), or a decimal point( 1017 AM 11/6/2017 68

Explanation / Answer

It is given that machine costs 350,000

So the initial cash flow i.e. CF0 = -350,000 (where negative sign represents cash outflow)

For years 1 to 4 Cash flow will be calculated as Savings - cost ( as savings is the money the comes in by way of saving labor cost and maintainence and operating expense are the cash flows that is going out from the firm)

In year 5 cash flow is Savings - cost + scrap value (scrap value is added as by selling machine money will come in)

Below is the table containing all the cash flows:

IRR is the rate of return that makes the value of NPV as zero

NPV is sum of present value of all cash flows

Present value = cash flow/(1+r)n, where r is rate of return and n is number of years

So in this case NPV = CF0 + CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + CF4/(1+r)4 + CF5/(1+r)5

NPV = -350000 + 100000/(1+r)1 + 150000/(1+r)2 + 125000/(1+r)3 + 10000/(1+r)4 + 500/(1+r)5

IRR is the value of 'r' that will make the above equation equal to zero

Now equating to zero, -350000 + 100000/(1+r)1 + 150000/(1+r)2 + 125000/(1+r)3 + 10000/(1+r)4 + 500/(1+r)5 = 0

Solving this equation we will get r as 5.20%

Therefore, IRR = 5.20%

Question 2

We will use above NPV equation

NPV = CF0 + CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + CF4/(1+r)4 + CF5/(1+r)5

'r' is given as 7% in this case

Putting all values in the equation,

NPV = -350000 + 100000/(1+0.07)1 + 150000/(1+0.07)2 + 125000/(1+0.07)3 + 10000/(1+0.07)4 + 500/(1+0.07)5

Solving this equation we will get NPV = -12295.13

Therefore, NPV = -12295.13

Year Cost Savings Cash Flow 0 -350000 -350000 1 100000 200000 100000 2 150000 300000 150000 3 175000 300000 125000 4 190000 200000 10000 5 225000 200000 5000

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