A new product manager presents to you, the Chief Financial Officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $20,000 by the end of year 4, will bring both praise and approval. You explain the company uses a 12% discount rate for cash flows and project related budgeting. You take the time to present the details of the Net Present Value (NPV) model used to assess product proposals. The data is below.

Project Outflows to Buy Machine

Day 1 Cash Out -$70,000 12% discount rate applied

End Year Repayment $10,000

End Year 2 Cash Repayment $20,000

End year 3 Cash Repayment $30,000

End Year 4 Cash Repayment$30,000

Evaluate how the Time Value of Money concept results in a discounted cash flow in year 4 (an amount less than $30,000).

Correctly sums the discountedstream of cash flows.

Assesses the investment option using a 12% cost of capital discount rate by applying the Net Present Value (NPV) model. Include values in your assessment.

Correctly calculates the NPV at 12% cost of capital discount rate. Include values in your assessment.

Assesses the investment option when a 7% cost of capital discount rate, versus a 12% cost of capital discount rate is applies. Includes values in his/her assessment. Provides the NPV at a 7% cost of capital discount rate.

Correctly calculates the NPV at a 12% cost of capital discount rate. Include values in your assessment.