NPV and maximum return???A firm can purchase new equipment for a $20,500 initial investment. The equipment...

Free

60.1K

Verified Solution

Question

Finance

NPV and maximum return???A firm can purchase new equipment for a$20,500 initial investment. The equipment generates an annual?after-tax cash inflow of $5,000 for 7 years.
a. Determine the net present value (NPV?) of the? asset,assuming that the firm has a cost of capital of 11?%. Is theproject? acceptable?
b. Determine the maximum required rate of return that the firmcan have and still accept the asset.

Answer & Explanation Solved by verified expert

3.9 Ratings (447 Votes)

Discount rate	11.000%
Year	0	1	2	3	4	5	6	7
Cash flow stream	-20500	5000	5000	5000	5000	5000	5000	5000
Discounting factor	1.000	1.110	1.232	1.368	1.518	1.685	1.870	2.076
Discounted cash flows project	-20500.000	4504.505	4058.112	3655.957	3293.655	2967.257	2673.204	2408.292
NPV = Sum of discounted cash flows
NPV Project =	3060.98
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

IRR is the rate at which NPV =0
IRR	15.49%
Year	0	1	2	3	4	5	6	7
Cash flow stream	-20500.000	5000.000	5000.000	5000.000	5000.000	5000.000	5000.000	5000.000
Discounting factor	1.000	1.155	1.334	1.540	1.779	2.055	2.373	2.740
Discounted cash flows project	-20500.000	4329.385	3748.715	3245.926	2810.573	2433.611	2107.208	1824.583
NPV = Sum of discounted cash flows
NPV Project =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

IRR=	15.49% = max rate

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

NPV and maximum return???A firm can purchase new equipment for a$20,500 initial investment. The equipment generates an annual?after-tax cash inflow of $5,000 for 7 years.a. Determine the net present value (NPV?) of the? asset,assuming that the firm has a cost of capital of 11?%. Is theproject? acceptable?b. Determine the maximum required rate of return that the firmcan have and still accept the asset.