Montego Production Co. is considering an investment in new machinery for its factory. Various information about the

Question:

Montego Production Co. is considering an investment in new machinery for its factory. Various information about the proposed investment follows:

Initial investment ..........$860,000

Useful life ............. 6 years

Salvage value ........... $ 20,000

Annual net income generated ..... $ 66,000

Montego’s cost of capital ...... 11%

Required:

Help Montego evaluate this project by calculating each of the following:

1. Annual rate of return.

2. Payback period.

3. Net present value.

4. Recalculate Montego’s NPV assuming its cost of capital is 12 percent.

5. Based on your calculations of NPV, what would you estimate the project’s internal rate of return to be?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...