Assignment Problem Windrunner Corp. is considering a new machine that requires an initial investment of $800,000 installed and has a useful life of 10 years. The expected annual after-tax cash flows for the machine are $120,000 during the first 5 years, $150,000 during years 6 through 8 and $180,000 during the last two years. (i) (ii) Develop the timeline (linear representation of the timing of cash flows). Calculate the Internal Rate of Return (IRR). Calculate the Net Present Value (NPV) at the following required rates of return: (a) 9% (b) 10% (c) 11% (d) 12% Using IRR and NPV criterion, comment if the project should be accepted or rejected at the following required rates of return: (a) 9% (b) 10% (c) 11% (d) 12% Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis). (iv) (v) Sample Question and Solution Question: Your firm is considering an investment that will cost $1.5 million today today. The project will produce cash flows of $350,000 in year 1, $390,000 in years 2 through 4, and $450,000 in year 5. (i) Develop the timeline (linear representation of the timing of cash flows). (ii) Calculate the Internal Rate of Return (IRR). (iii) Calculate the Net Present Value (NPV) at the following required rates of return: (a) 7% (b) 8% (c) 10% (d) 12% (iv) Using IRR and NPV criterion, comment if the project should be accepted or rejected at the following required rates of return: (a) 7% (b) 8% (c) 10% (d) 12% (v) Plot the Net Present Value profile (NPV on Y axis and rates of return on X-axis). Solution: (i) Timeline Years 0 Cash Flows-1,500,000 1 350,000 2 390,000 3 390,000 4 390,000 5 450,000 (ii) IRR: 9.48% (iii) (a) NPV at 7%: $104,473 (a) NPV at 8%: $60,955 (b) NPV at 10%: ($20,702) (c) NPV at 12%:($95,806) (iv) (a) At required rate of return of 7%, accept the project since IRR > 7% and NPV>0 (b) At required rate of return of 8%, accept the project since IRR > 8% and NPV >0 (c) At required rate of return of 10%, reject the project since IRR