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Question - The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $250,000 and is expected to have a useful life of 5 years, with a terminal disposal value of $10,000. Additional working capital of $25,000 is needed to keep the machine running efficiently, but this investment is fully recoverable at the end of the project. The company uses the straight-line depreciation method for its non-current assets, and its required rate of return is 10%. The annual cash flows have the following projections.
Year
Cash Flow
1
$80,000
2
100,000
3
80,000
4
60,000
5
20,000
Required -
(a) Calculate the payback period of the new machine.
(b) Calculate the net present value (NPV) of the new machine.
(c) Calculate the Internal rate of return (IRR) of the new machine, using the interpolation method
(d) Should the project be accepted? Why?
(e) Do you agree with the statement "only quantitative outcomes are relevant in investment appraisal analysis"? Explain.
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