Uncle Mikes Tire Company is considering the purchase of a new machine that would increase the speed

Question:

Uncle Mike’s Tire Company is considering the purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is $80,000. The annual cash flows have the following projections.

Year Cash Flow

1 ...........$20,000.00

2 ...........$30,000.00

3 ........... $25,000.00

4 ........... $10,000.00

5 ........... $ 7,500.00

a. If the cost of capital is 12 percent, what is the net present value?

b. What is the payback period?

c. Should the project be accepted or rejected based on NPV? Why?

Net Present Value
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