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3 February, 01:09

Major Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $130,000. The equipment will have an initial cost of $665,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 8%. Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.)

a. What is the net present value?

b. What would the net present value be with a 12% hurdle rate? (Negative amounts should be indicated by a minus sign.)

c. Based on the NPV calculations, in what range would the equipment's internal rate of return fall? (Round your answer to 2 decimal places.)

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  1. 3 February, 05:05
    0
    a. $ 82, 063

    b. - $ 19,206

    c. 11.24%

    Explanation:

    Net Present Value is calculated by taking the Present Day (Discounted) value of all future Net Cash flows based on the company's Cost of Capital and subtracting the Initial Cost of the Investment.

    Using a Financial Calculation

    a.

    Cash flow Amount

    Cf0 = ($665,000)

    Cf1 = $130,000

    Cf2 = $130,000

    Cf3 = $130,000

    Cf4 = $130,000

    Cf5 = $130,000

    Cf6 = $130,000

    Cf7 = $130,000

    Cf8 = $130,000

    i = 8%

    NPV = $ 82, 063

    b.

    Cash flow Amount

    Cf0 = ($665,000)

    Cf1 = $130,000

    Cf2 = $130,000

    Cf3 = $130,000

    Cf4 = $130,000

    Cf5 = $130,000

    Cf6 = $130,000

    Cf7 = $130,000

    Cf8 = $130,000

    i = 12%

    NPV = - $ 19,206

    c.

    Internal Rate of Return = P + ((N-P) * p / (p+n))

    = 8% + ((12%-8%) * $ 82, 063 / ($ 82, 063 + $ 19,206))

    = 11.24%
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