Each of the following scenarios is independent. All cash flows are after-tax cash flows.

Required:

Le Wetzel Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be $600,000 per year. The system costs $3,600,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent.

Should the company buy the new system?

Nephi Swasey has just invested $540,000 in a restaurant specializing in German food.

He expects to receive $86,940 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Nephi make a good decision?

LO1