The company Betamax is considering buying a new barcoding machine. The investmen
ID: 2523407 • Letter: T
Question
The company Betamax is considering buying a new barcoding machine. The investment proposal passed the initial screening tests, so the company now wants to analyze the proposal using the discounted cash flow methods. The bar coding achine costs $48,000, has a five-year life, and has no residual value. The estimated t cash inflows are $13,000 per year over its life. The company's hurdle rate is ne 12 1) Compute the bar-coding machine's NPV. 2) Find the bar-coding machine's IRR 3) Should Betamax buy the bar coding machine? Why or why not?Explanation / Answer
Answer 1. For calculating NPV we require present value factor @ 12% which can be calculated as 1/1.12 , 1/(1.12)^2 and so on
Answer 2 : IRR can be solved by trial and error method by substituting 12% with 11%
46.66122944
since in this case the NPV is positive now exact IRR can be calculated using differenec between NPV / difference between basis points (1%=100 basis points)
therefore IRR= 11% + (-46-1137)/100
11.1183%
Answer 3. Betamax must not buy the bar coding machine at hurdle rate of 12% since the net present value in this case is negative. At any hurdle rate equal to or below 11.1183% betamax must buy the machine.
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Year Cashflow PV factor Cashflow*Pv factor 0 -48000 1 -48000 1 13000 0.892857 11607.14286 2 13000 0.797194 10363.52041 3 13000 0.71178 9253.143222 4 13000 0.635518 8261.735019 5 13000 0.567427 7376.549124 NPV -1137.90937