25 Jul WITH A COST OF CAPITAL OF 12 PERCENT SHOULD THE MACHINE BE PURCHASED?
Homeland Security Systems Homeland Security Systems Solution: Solution: Show your work! Show your work! Equipment $40000 STEP 1: Show more Homeland Security Systems Homeland Security Systems Solution: Solution: Show your work! Show your work! Equipment $40000 STEP 1: Average the inflows Average the inflows Year Cash Flow 1 $20000 2 $18000 3 $13000 STEP 2: Divide investment by annuity from step 1 Divide investment by annuity from step 1 Divide investment by annuity from step 1 STEP 3: Find the rate that corresponds to the value in Step 2: Find the rate that corresponds to the value in Step 2: Find the rate that corresponds to the value in Step 2: Find the rate that corresponds to the value in Step 2: STEP 4: Calculate the Present Value at 14% Calculate the Present Value at 14% Because the inflows are biased toward the early years we will use the higher rate of 14%. Because the inflows are biased toward the early years we will use the higher rate of 14%. Because the inflows are biased toward the early years we will use the higher rate of 14%. Because the inflows are biased toward the early years we will use the higher rate of 14%. Because the inflows are biased toward the early years we will use the higher rate of 14%. Because the inflows are biased toward the early years we will use the higher rate of 14%. Because the inflows are biased toward the early years we will use the higher rate of 14%. Year Cash Flow PVIF @ 14% Present Value 1 2 3 STEP 5: Calculate the Present Value at 15% Calculate the Present Value at 15% Since the NPV is slightly over $40000 we need to try a higher rate. We will try 15%. Since the NPV is slightly over $40000 we need to try a higher rate. We will try 15%. Since the NPV is slightly over $40000 we need to try a higher rate. We will try 15%. Since the NPV is slightly over $40000 we need to try a higher rate. We will try 15%. Since the NPV is slightly over $40000 we need to try a higher rate. We will try 15%. Since the NPV is slightly over $40000 we need to try a higher rate. We will try 15%. Year Cash Flow PVIF @ 15% Present Value 1 2 INTERPOLATION: 3 PV @ 14% PV @ 15% PV @ 14% Cost IRR = b) With a cost of capital of 12 percent should the machine be purchased? With a cost of capital of 12 percent should the machine be purchased? With a cost of capital of 12 percent should the machine be purchased? With a cost of capital of 12 percent should the machine be purchased? With a cost of capital of 12 percent should the machine be purchased? With a cost of capital of 12 percent should the machine be purchased? Explain: Show less
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