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70 Font Format as Table Cells Editing Ideas Sensitivit Alignment Number Cell Styles Sensitivity Clipboard Styles Ideas It looks like your stored credentials are out of date. Please sign in as ro******@ne *****.edu so we can verify your subscription. Sign In i SIGN IN TO OFFICE 344 X fi A D B E F J M G K H 8 2 3 1 Part 3 Refer to Problem 12-18 (Create - 193-194, Page 413-414) Internal Rate of Return Note: Complete questions b and c only (skip question a) Deduct (1) for wrong out of 100. b. Note: "Append". = appendix A,B,C, & D with present and future value tables Step 1 Average inflows (assumed annuity) to arrive at present value factor (equate to Appen D) Year Inflows 1 $23.000 2 $26.000 3 $29.000 4 $15.000 GA 5 $8,000 Using Appendix D Total $101.000 Look-up closest % Closest Assumed for "assumed" annuity percentage Annuity factor for 1st part of for Assumed Investment Appex D Step 2 below Annuity Only an approx. % = for 5 years Step 2 RR approximation (use Appendix B for both 20% & 25% "factors") (Next higher % to look up "factors" below) Present Value at the 20% discount rate (as lump sums) Present Value at the 25% discount rate (as lump sums) Inflows PV"actor" $ PV Inflows PV"factor" SPV 1 $23,000 0.885 $20,355 $23,000 2 $26,000 0.783 $20.358 $26,000 3 $29.000 0.693 $20.097 $29,000 4 $15,000 0.613 $9.195 $15,000 5 $8,000 0.543 $4,344 $8,000 Total $74,349 Total For an investment of % is too low For an investment of: % is too high Step 3 Interpolation to arrive at fraction of percentage above lower rate PV amt of Range of PV amt of Range % cash flow discount % 1 cash flow/cos or Cost $74,349 $74,349 Year 3 2 3 9 3 1 2 3 4 5 6 7 = Investment Cost Difference Difference % Range Difference Higher % Difference Lower % Enter as whole number Difference plus 2 decimal places Fraction of 5%: X ( -- Actual IRR Percentage 9 D 1 2 3 4 5 6 7 8 9 0 1 2 3 34 5 6 37 7 38 89 30 91 32 83 fraction of 5% Internal Rate of Return 20% Question Deduct 1-4 for poor or incorrect reason C. Enter the letter Y for accept and N for do not accept. With cost of capital at 10% should the project be accepted? Why? If we want to be more accurate, as we want to for this problem, the results can be interpolated by selecting rates either side of the present value of the investment and the 35 b. 8 percent discount rate? What is the internal rate of return? In this problem, would you make the same donininder both parts c. vid b2 18. The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $60,000. The annual cash flows have the following ar projections. re (1 Year 1 O AWN Cash Flow $23,000 26,000 29,000 15,000 8,000 nance Part 4 The Capital Budgeting Process a. C. If the cost of capital is 13 percent, what is the net present value of select- ing a new machine? b. What is the internal rate of return? Should the project be accepted? Why? 19. You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method combined with the profitabil- ity index approach described in footnote 2 of this chapter, which project would you select? Use a discount rate of 14 percent