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Simone Company is considering the purchase of a new machine costing $50,000. It is expected to save $9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned. Using the net present value method, determine if the proposal is acceptable and Calculate the time-adjusted rate of return. Assume all tax effects are included in these numbers.

Sagot :

Parrain

Answer:

  • Project not acceptable as NPV is negative at -$9,553.10
  • Time-adjusted rate of return = 12.41%

Explanation:

The Net Present value works by deducting the cost from the present value of benefits. If this amount is positive then the project is a good one.

= Present value of benefits - Present value of cost

Benefits are $9,000 a year for 10 years. This is constant so is annuity.

Cost is the $50,000 purchase price.

= (9,000 * Present value interest factor of annuity, 10 years, 18%) - 50,000

= (9,000 * 4.4941) - 50,000

= -$9,553.10

Project is not acceptable because NPV is negative.

Time-adjusted rate of return is the Internal Rate of Return which is the return that brings NPV to zero.

Use Excel or a Financial calculator for it(Worksheet attached):

= 12.41%

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View image Parrain
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