You own a lawn mowing company and are planning to buy some equipment for your company. The
Question:
You own a lawn mowing company and are planning to buy some equipment for your company. The equipment will cost you $200,000. From the new equipment you expect to make $70,000 in the first year. Then in years two through five, your payouts from the equipment are expected to DECLINE by 10% per year relative to the previous year. Then in year six, the payout is expected to be $40,000, including any proceeds from the sale of the used equipment. The discount rate for this investment is 13%. Assume all future cash flows occur at the end of the year.
A.Compute the investment's NPV using Excel.
B.Compute the IRR of the investment.
C.Would you invest in the project based on its NPV? Would you invest in the project based on its IRR?
D.Set up a loan table with $200,000 as the beginning principal and the yearly payouts from the equipment as the annual payments. Use the IRR computed in part B above as the interest rate. If you set up the loan table correctly, the balance at the end of the last year would be zero.
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-1259692406
18th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello