The assessment requires the application of the net present value $($NPV$)$ model to assess investment options given cost of capital, commonly referred to as discount rates, and required rates of returns. You will explain the role of a discount rate in evaluating the NPV model and compare investment options as cost of capital increases or decreases. The use of a financial calculator and$/$or Excel will be required for this part of the assessment.

Read the scenario and address all of the checklist items.

Scenario: 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 $$30,000$ by the end of Year $4,$ will bring both praise and approval. You explain the company uses a $13\%$ 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 $-$$$90,00013\%$ discount rate applied.

End Year $1$ Cash Repayment $$30,000$

End Year $2$ Cash Repayment $$30,000$

End Year $3$ Cash Repayment $$30,000$

End Year $4$ Cash Repayment $$30,000$

To educate the new manager, and as CFO, you take the time to evaluate the following:

Checklist:

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

Assess the investment option using a $13\%$ cost of capital discount rate by applying the NPV model. Include values in your assessment. Provide the NPV at a $13\%$ cost of capital discount rate. Include values in your assessment.

Assess the investment option with an $8\%$ cost of capital discount rate.