1) Kingston Corporation is considering a new machine that requires an initial investment of $550,000, including installation costs, and has a useful life of eight years. The expected annual after-tax cash flows for the machine are $89,000 during the first three years, $95,000 during years four through six, and $105,000 during the last two years. 1. (a) Calculate the internal rate of returnIRR (round your answer to two decimal places). 2. (b) Calculate the net present valueNPVat the following required rates of return (round your answers to two decimal places): (1) 3% (2) 4% (3) 8% (4) 9% 3. (c) Using the IRR and NPV criterion, comment if the projects should be accepted or rejected at the following required rates of return: (1) 3% (2) 4% (3) 8% (4) 9% 4. (d) Plot the NPV profile (NPV on the Y-axis and the required rates of return on the X-axis).

You are required to use a spreadsheet (Excel) to solve 10 different parts of a single problem (provided on page 4) related to capital budgeting. You are required to show the following two steps for the problem (a sample problem and solution is provided for guidance).

1. (i) Develop a timeline (linear representation of the timing of cash flows).
2. (ii) Calculate the correct solutions to the problem components.

Sample Problem #1:

Sample Problem and Solution

Your firm is considering an investment that will cost $1.5 million today. The project will produce the following cash flows in years 15: $350,000, $390,000, $390,000, $390,000, and $450,000, respectively.

1. (a) Calculate the internal rate of return (IRR).
2. (b) Calculate the net present value (NPV) at the following required rates of return:

(1) 7% (2) 8% (3) 10% (4) 12%

3. (c) Using the IRR and NPV criterion, comment if the projects should be accepted or rejected at

the following required rates of return:

(1) 7% (2) 8% (3) 10% (4) 12%

4. (d) Plot the NPV profile (NPV on the Y-axis and the required rates of return on the X-axis).

Solution:

1. (i) Develop the timeline:

Years 0 1 2 3 4 5 Cash Flows

$1,500,000 $350,000 $390,000 $390,000 $390,000 $450,000

2. (ii) Calculation (using Excel):
   1. (a) IRR: 9.48%
   2. (b) (1) NPV @ 7% = $104,472.99 (2) NPV @ 8% = $60,954.87 (3) NPV @ 10% = ($20,701.52) (4) NPV @ 12% = ($95,805.96)
   3. (c) (1) Required return = 7%; accept the project since the IRR > 7% and the NPV > 0. (2) Required return = 8%; accept the project since the IRR > 8% and the NPV > 0. (3) Required return = 10%; reject the project since the IRR < 10% and the NPV < 0. (4) Required return = 12%; reject the project since the IRR < 12% and the NPV < 0.

(d) NPV Profile: