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B by dividing 40000 by the annual cash inflow of

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b.By dividing $40,000 by the annual cash inflow of $12,000, it is determined that the discount factor associated with the IRR is3.3333. This discount factor is associated with an interest rate that lies between 7 and 8 percent. Using interpolation, the IRRis computed to be approximately 7.72 percent.
178. Merrill Productions is considering the purchase of a new movie camera, which will be used for majormotion pictures. The new camera will cost $30,000, have an eight-year life, and create cost savings of $5,000per year. The new camera will require $700 of maintenance each year. Merrill Productions uses a discount rateof 9 percent.Present value tables or a financial calculator are required.a.Compute the net present value of the new camera.b.Determine the payback period.a.Cost savings per year$5,000Maintenance per year(700)Net cash flows per year$4,300CashDiscount factorPresent value$(30,000)1.0000$(30,000)4,3005.534823,800Net present value ofinvestment$ (6,200)b.Payback equals $30,000/$4,300 = 6.976 years179. Stone Corporation is interested in purchasing a state-of-the-art widget machine for its manufacturing plant.The new machine has been designed to basically eliminate all errors and defects in the widget-makingproduction process. The new machine will cost $150,000, and have a salvage value of $70,000 at the end of itsseven-year useful life. Stone has determined that cash inflows for years 1 through 7 will be as follows: $32,000;$57,000; $15,000; $28,000; $16,000; $10,000, and $15,000, respectively. Maintenance will be required in years3 and 6 at $10,000 and $7,000 respectively. Stone uses a discount rate of 11 percent and wants projects to have apayback period of no longer than five years.Present value tables or a financial calculator are required.a.Compute the net present value of the new machine.b.Compute the firm's profitability index.c.Compute the payback period.d.Evaluate this investment proposal for Stone Company..79|P a g e
a.YearCash flowDiscount factorPresent value1$(150,000) 1.0000$(150,000)132,000.900928,829257,000.811646,26135,000.73123,656428,000.658718,444516,000.59359,49663,000.53461,604715,000.48177,226770,000.481733,719Net present value$(765)b.Profitability index equals present value of cash flows divided by investment: $149,235/$150,000 = .995c.Payback period is 6.11 years, computed as follows:YearCash FlowCumulative Cash Flow1$32,000$ 32,000257,00089,00035,00094,000428,000122,000516,000138,00063,000141,000785,000226,000$150,000 - $141,000 = $9,000/$85,000 = .11d.The project is quantitatively unacceptable because it has a negative NPV, a less-than-one PI, and a payback period of over sixyears. However, the NPV and PI are extremely close to being acceptable. Because the new machine will provide Stone zero-defect production, the investment may be desirable if additional qualitative factors are considered such as improvedcompetitive position, customer satisfaction, goodwill generated, improved product quality and reliability, and a desire to be inthe forefront of manufacturing capability. Stone may want to attempt to quantify these benefits and reevaluate the machine'sacceptability as an investment.

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