Q1: NPV:

A company is considering investing in a machine that costs $80,000 with immediate full payment arrangement and which then produces cash revenue of $40,000, $50,000, $20,000 and $10,000 at times 1,2, 3 and 4. The incremental fixe cost for the machine maintenance and repair tasks is estimated to $5,000 p.a throughout the project life.

The company has accounting policy to charge machine cost as depreciation with method of straight line and the estimated useful life of machine is 4 years. Scrap value (disposal proceed) of the machine at end of the project is estimated to be $5,000.

Requirement:

1. Assumed that cost of capital of the organization (discount rate) is 10%, is the projects Net Present Value (NPV) worthwhile? 12 marks

Discount factor table extracts

Time Factor

Factor 10% Factor 20%

1 0909 0833

2 0826 0694

3 0751 0579

4 0683 0482

5 0621 0402

(b) calculate IRR for the project and comment on acceptability of project if management demanded a target rate of return with 17%.