Recent technology has made possible a computerized vending machine that can grind coffee beans and brew fresh coffee on demand. The computer also makes possible such complicated functions as changing $5 and $10 bills, tracking the age of an item, and moving the oldest stock to the front of the line, thus cutting down on spoilage. With a price tag of $4,500 for each unit, Easy Snack has estimated the cash flows in millions of dollars over the product's six-year useful life, including the initial investment, as given in Table P7.36.
TABLE P7.36
n Net Cash Flow
0.................................. -$30
1.................................. 9
2.................................. 18
3.................................. 20
4.................................. 18
5 .................................. 10
6.................................. 5
(a) On the basis of the IRR criterion, if the firm's MARR is 18%, is this product worth marketing?
(b) If the required investment remains unchanged, but the future cash flows are expected to be 10% higher than the original estimates, how much of an increase in IRR do you expect? (c) If the required investment has increased from $30 million to $35 million, but the expected future cash flows are projected to be 10% smaller than the original estimates, how much of a decrease in IRR do you expect?