Problem 12-18 Net present value and internal rate of return methods ILO4] The Pa
ID: 2803102 • Letter: P
Question
Problem 12-18 Net present value and internal rate of return methods ILO4] The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $75,000. The annual cash flows have the for an approximate answer but cakulate your final answer using the formula and financial calculator methods 1 $ 30,000 2 35,000 3 38,000 25,000 5 19,000 a. If the cost of capital is 11 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places) b. What is the internal rate of return? (Do not round i percent rounded to 2 decimal places) Intemai ate of retuS c. Should the project be accepted? O Yes O NoExplanation / Answer
a) Year Cash flow PVIF at 11% PV at 11% 0 -75000 1 -75000 1 30000 0.90090 27027 2 35000 0.81162 28407 3 38000 0.73119 27785 4 25000 0.65873 16468 5 19000 0.59345 11276 35963 NPV = $35,963 b) IRR is that discount rate for which NPV = 0. It has to be found out by trial error using different discount rates, Year Cash flow PVIF at 30% PV at 30% PVIF at 29% PV at 29% 0 -75000 1 -75000 1 -75000 1 30000 0.76923 23077 0.77519 23256 2 35000 0.59172 20710 0.60093 21032 3 38000 0.45517 17296 0.46583 17702 4 25000 0.35013 8753 0.36111 9028 5 19000 0.26933 5117 0.27993 5319 -46 1336 IRR = 29+1336/(46+1336) = 29.97% c) Yes, the project should be accepted as the NPV is positive (because of which IRR>COC)