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Should the Pan American Bottling Company Purchase a New Machine?

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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 attached projections.

Year Cash Flow
1 \$15 000
2 20 000
3 25 000
4 10 000
5 5000

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 Preview

a) Net Present Value:

Year Net Cash Flow
0 (\$45,000)
1 \$15,000
2 \$20,000
3 \$25,000
4 \$10,000
5 \$5,000

Cost of capital = Discount rate = 10%

Year Cash Flow Discount Factor @ Discounted Cash Flow = 10%
0 (45,000) 1 - 45,000 =-45000*1
1 15,000 ...

Solution Summary

This solution calculates both the Net Present Value (NPV) and the Internal Rate of Return (IRR) in order to decide whether or not the project being advised in this case should be accepted. This solution provides a step by step response, providing all required variables and calculations.

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