Question: Montego Production Co is considering an investment in new machinery

Montego Production Co. is considering an investment in new machinery for its factory. Various information about the proposed investment follows:
Initial investment .......... $860,000
Useful life ............. 6 years
Salvage value ........... $ 20,000
Annual net income generated ..... $ 66,000
Montego’s cost of capital ...... 11%

Help Montego evaluate this project by calculating each of the following:
1. Annual rate of return.
2. Payback period.
3. Net present value.
4. Recalculate Montego’s NPV assuming its cost of capital is 12 percent.
5. Based on your calculations of NPV, what would you estimate the project’s internal rate of return to be?

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  • CreatedFebruary 27, 2015
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