Question: Michael Scott Paper, Inc. is considering a new machine that requires an initial investment of $650,000, including installation costs, and has a useful life of

Michael Scott Paper, Inc. is considering a new machine that requires an initial investment of $650,000, including installation costs, and has a useful life of ten years. The expected annual after-tax cash flows for the machine are $90,000 during the first two years, $115,000 during years three through six, and $85,000 during the remaining years of its useful life. The internal rate of return (IRR) is 8.5%, the discount rate is 3%?

 

If the discount rate is on the x-axis and the NPV is on the y-axis, and you plot the four NPV and discount rate pairs from your previous analysis on the graph and connect those dots with a straight line, where would that line cross the x-axis?

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To find where the line crosses the xaxis ie where NPV 0 we can use the Net Present Value NPV formula ... View full answer

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