The company Betamax is considering buying a new barcoding machine. The investmen
ID: 2525035 • 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 machine costs $48,000, has a five-year life, and has no residual value. The estimated net cash inflows are $13,000 per year over its life. The company's hurdle rate is 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
1.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=13000/1.12+13000/1.12^2+13000/1.12^3+13000/1.12^4+13000/1.12^5
=13000[1/1.12+1/1.12^2+............+1/1.12^5]
=$13000*3.604776202
=$46862.09
NPV=Present value of inflows-Present value of outflows
=$46862.09-$48000
=($1137.91)(Negative)(Approx).
2.
Let irr be x%
At irr,present value of inflows=present value of outflows.
48000=13000/1.0x+13000/1.0x^2+13000/1.0x^3+13000/1.0x^4+13000/1.0x^5
Hence x=irr=11.04%(Approx)/
3.Since NPV is negative and IRR is less than the hurdle rate also;bar coding machine should not be bought.