2. You purchase a new lathe for your shop. It costs $10,000 and will expand your business cash flow by $1,500/year in year 1 and these will grow by 5% per year. The system will work for 8 years before you have to replace it. What are the NPV (use a 4% discount rate) and IRR? The vendor offers you an extended warranty costing $15,000 on top of the purchase price.

This warranty extends the lathes life by 8 years.

a. What are the NPV and the IRR of the machine with the extended warranty?

b. Should you get it?

Lathe w/extended Lathe warranty Discount rate Growth rate NPV IRR Cash flows: Start Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7