Purchase Solution

12-14 Pan American Bottling purchase of machine: NPV, IRR, accept the project?

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12/14. 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 \$45,000. The annual cash flows have the following projections:

Year Cash Flow
1 . . . . . . . . . . \$15,000
2 . . . . . . . . . . 20,000
3 . . . . . . . . . . 25,000
4 . . . . . . . . . . 10,000
5 . . . . . . . . . . 5,000

a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine?

b. What is the internal rate of return?

c. Should the project be accepted? Why?

Solution Summary

The calculations and explanations are more than adequate to explain the problems.

Solution Preview

a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine?

We can use EXCEL command "NPV(10%, 15000,...,5000) to calculate the PV of all the cash flows(discounted at 10%):
Year CF
1 ...

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