Question 1

a) ABC, Inc. is considering an investment with an initial cost of $175,000 that would be depreciated straight line to a zero-book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years.

Required

What is the internal rate of return? If the required return from this project is 12%, should the project be accepted? Show your workings clearly. (25 marks)

b) ABC, Inc. is considering the purchase of a machine for $100,000. Buying the machine would save the company running costs of $25,000 each year for 5 years. At the end of this time, the machine could be sold off for $12,000. The company has a cost of capital of 9%

Required

Calculate the NPV of the project at the companys cost of capital of 9% and 12%. Estimate the IRR of this project. Show your workings clearly.