You are considering the purchase of a machine which would cost $105,000. If you purchase this machine,
Question:
You are considering the purchase of a machine which would cost $105,000. If you purchase this machine, it would increase cash flow for the company by the following amounts: Year 1 $5,000; Year 2 $40,000; Year 3, 4 and 5 cashflow would increase by $27,000. Assume a 9% cost of capital for the company and the value of the equipment is zero at the end of year 5. (Use the financial calculator and show your calculator keystrokes.)
Required
a) Draw a timeline showing all cashflows involved with this project
b) Calculate the payback (in years) for this project. If the company has a mandatory minimum payback of 3 years, should you accept the project?
c) Calculate the net present value of a project if the required rate of return is 9 percent? Explain why you should or should not accept the project based on NPV.
d) Calculate the IRR. Explain why you should or should not accept the project based on IRR. (The required rate of return is 9%)