Can someone please brake down this problem step by step The green Goddess Salad
ID: 2427805 • Letter: C
Question
Can someone please brake down this problem step by step
The green Goddess Salad Oil Company is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost os theis machine is 45,000. The annual cash flow are prjected as the following:
Year Cash Flow
1 15,000
2 20,000
3 25,000
4 10,000
5 5,000
A. if the cost capital is 10%, what is the net present value of selecting the new machine?
B. What is the rinternal rate of return?
c. Should the project be accepted? Why?
Explanation / Answer
net present value = 58865-45000=$13865
IRR is rate at which NPV = 0
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
IRR = 22.99% p.a.
C.
Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects a firm is considering on a relatively even basis. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
So the given project must be undertaken.
year present value of 1$ WITH COST OF CAPITAL 10% net cash flow Present value of cash flow .909 15000 13635 .826 20000 16520 .751 25000 18775 .683 10000 6830 .621 5000 3105 total 75000 58865