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

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Finance

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 ofreturn:
(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

3.9 Ratings (759 Votes)

First list down the information provided in questionInitial Investment CF0 800000Useful life 10 yearsExpected annual cash flows after taxYear 15 120000Year 68 150000Year 910 180000i Timeline ofcash flowsii Calculatethe Internal Rate of Return IRRAs per definition IRR is the discount rate that makes thepresent value of future after tax cash flows equal to theinvestment outlayTherefore at IRR CF0 PVof future after tax cash flowsThe following steps needs to be followed for calculatingIRRStep no 1 First prepare the following tableto list down all year wise cash flowsYearsCash Flows0 8000001 1200002 1200003 1200004 1200005 1200006 1500007 1500008 1500009 See Answer

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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 ofreturn:(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)