jackieallen85
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xavier c. wants to purchase a machine for $37,000 with a four year life and $1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years.

a) What is the machine's net present value (round to the nearest whole dollar?

b) What is the machine's internal rate of return?

Respuesta :

mathmate
(a) Net present value of machine
Pm=-C+V/(1+i)^n=37000-1000/1.08^4
=-36264.97
=-36265 (rounded to nearest dollar)

Cost of machine amortized over 4 years (annualized cost)
Ac=Pm(A/P,i,n)=-36264.97(A/P,0.08,4)=-36264.97(.08*(1.08^4)/(1.08^4-1)
=-10949.15

Expected year-end cash flow = annualized return - annualized cost  =>
12000=return - 10949.15

(b) Internal rate of return of machine
=return/cost - 1
=(12000-(-10949.15)/10949.15-1
=2.096-1
=1.096
=109.6%

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