Question 1:

Given the information below Calculate the NPV, Internal Rate of Return (IRR), and the Modified IRR for the sustainable machine. Should Mr. Ortega authorize its purchase? Why or why not?

The equipment broker outlines the project as follows:

The new machine costs $375,000.00 with installation/modification of $81,000.

Net working capital is projected to increase by $55,000 (mainly inventory, spare parts)

The machine is expected to generated $1,000,000 in sales in Year 1 and sales will grow by 10% in Years 2 and 3.

Costs are expected to be 50% of sales

Cannibalization costs of other drinks are expected to be $22,000 per year

Depreciation is reported using the straight-lined method

At the end of three years, the machines salvage value is projected to be $95,000

The tax rate is 35% and the cost of capital is 17%