Purchase Solution

# Should the Pan American Bottling Company Purchase a New Machine?

Not what you're looking for?

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 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.

##### 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 ...

##### Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

##### Basics of corporate finance

These questions will test you on your knowledge of finance.