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    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?

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    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 ...

    Solution Summary

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

    $2.19

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