1. Suppose Keynes, Inc is considering buying a machine that will generate revenues of $6 million annually...
Question:
1. Suppose Keynes, Inc is considering buying a machine that will generate revenues of $6 million annually for two years and $2 million in the third year. After three years the machine is worthless. If Keynes, Inc buys the machine, it must make a deposit of $ 2 million today and pay a further $11 million two years from now. Keynes, Inc has a minimum acceptable rate of the return policy on investments set at 5%.
a. Using an Excel function, find the breakeven interest rate.
b. Using the project balances, show that this is a mixed investment.
c. Write formulas for the project balances to correctly reflect that this is a mixed investment. Note make cell B1 the location of the (as yet unknown) True IRR.
d. Use the Excel Goal Seek function (located in Data | WhatIf Analysis) to find the True IRR.
e. Should Keynes, Inc buy the machine?
Business Statistics a decision making approach
ISBN: 978-0133021844
9th edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry