B by dividing 40000 by the annual cash inflow of

b. By dividing $40,000 by the annual cash inflow of $12,000, it is determined that the discount factor associated with the IRR is
3.3333. This discount factor is associated with an interest rate that lies between 7 and 8 percent. Using interpolation, the IRR
is computed to be approximately 7.72 percent.

178. Merrill Productions is considering the purchase of a new movie camera, which will be used for major
motion pictures. The new camera will cost $30,000, have an eight-year life, and create cost savings of $5,000
per year. The new camera will require $700 of maintenance each year. Merrill Productions uses a discount rate
of 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 $5,000
Maintenance per year (700 )
Net cash flows per year $4,300
Cash Discount factor Present value
$(30,000) 1.0000 $(30,000)
4,300 5.5348 23,800
Net present value of
investment
$ (6,200 )
b. Payback equals $30,000/$4,300 = 6.976 years
179. 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-making
production process. The new machine will cost $150,000, and have a salvage value of $70,000 at the end of its
seven-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 years
3 and 6 at $10,000 and $7,000 respectively. Stone uses a discount rate of 11 percent and wants projects to have a
payback 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. Year Cash flow Discount factor Present value
1 $(150,000) 1.0000 $(150,000)
1 32,000 .9009 28,829
2 57,000 .8116 46,261
3 5,000 .7312 3,656
4 28,000 .6587 18,444
5 16,000 .5935 9,496
6 3,000 .5346 1,604
7 15,000 .4817 7,226
7 70,000 .4817 33,719
Net present value $ (765 )
b. Profitability index equals present value of cash flows divided by investment: $149,235/$150,000 = .995
c. Payback period is 6.11 years, computed as follows:
Year Cash Flow Cumulative Cash Flow
1 $32,000 $ 32,000
2 57,000 89,000
3 5,000 94,000
4 28,000 122,000
5 16,000 138,000
6 3,000 141,000
7 85,000 226,000
$150,000 - $141,000 = $9,000/$85,000 = .11
d. The project is quantitatively unacceptable because it has a negative NPV, a less-than-one PI, and a payback period of over six
years. 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 improved
competitive position, customer satisfaction, goodwill generated, improved product quality and reliability, and a desire to be in
the forefront of manufacturing capability. Stone may want to attempt to quantify these benefits and reevaluate the machine's
acceptability as an investment.