Instructions: You are required to use a financial calculator or spreadsheet (Excel) to solve the following capital...

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Finance

Instructions:
You are required to use a financial calculator or spreadsheet(Excel) to solve the following capital budgeting problem (samplequestions and solutions are provided for guidance): WindrunnerCorp. is considering a new machine that requires an initialinvestment of $800,000 installed, and has a useful life of 10years. The expected annual after-tax cash flows for the machine are$120,000 during the first 5 years, $150,000 during years 6 through8 and $180,000 during the last two years.
(i) Develop the timeline (linear representation of the timing ofcash flows)
(ii) Calculate the Internal Rate of Return (IRR)
(iii) Calculate the Net Present Value (NPV) at the followingrequired rates of return: (a) 9% (b) 10% (c) 11% (d) 12%
(iv) Using IRR and NPV criterion, comment if the project shouldbe accepted or rejected at the following required rates of return:(a) 9% (b) 10% (c) 11% (d) 12%
(v) Plot the Net Present Value profile (NPV on Y axis and ratesof return on X-axis).

Answer & Explanation Solved by verified expert

3.6 Ratings (631 Votes)

i The timeline is provided in the image below The cash flowin year 0 is a cash outflow and hence it is indicated with adownward arrow Rest of the cash flows are inflows and hence anupward arrow is usedii IRR is the rate whichmakes the NPV as nil I have See Answer

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Transcribed Image Text

Instructions:You are required to use a financial calculator or spreadsheet(Excel) to solve the following capital budgeting problem (samplequestions and solutions are provided for guidance): WindrunnerCorp. is considering a new machine that requires an initialinvestment of $800,000 installed, and has a useful life of 10years. The expected annual after-tax cash flows for the machine are$120,000 during the first 5 years, $150,000 during years 6 through8 and $180,000 during the last two years.(i) Develop the timeline (linear representation of the timing ofcash flows)(ii) Calculate the Internal Rate of Return (IRR)(iii) Calculate the Net Present Value (NPV) at the followingrequired rates of return: (a) 9% (b) 10% (c) 11% (d) 12%(iv) Using IRR and NPV criterion, comment if the project shouldbe accepted or rejected at the following required rates of return:(a) 9% (b) 10% (c) 11% (d) 12%(v) Plot the Net Present Value profile (NPV on Y axis and ratesof return on X-axis).