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You are considering purchasing a machine (use your imagination) that will initially cost $175,000.00. The machine is expected to last 6 years, and you project

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You are considering purchasing a machine (use your imagination) that will initially cost $175,000.00. The machine is expected to last 6 years, and you project that you can sell the worn out machine at the end of 6 years for $50,000.00 Annual operating cash inflows and outflows are projected as follows, and are assumed to occur at the end of each year: Both of years 1 and 2, cash inflow $56,000.00, cash outflow expenses $20,000.00; both of years 3 and 4. cash inflow $60,000.00, cash outflow expenses $22,000.00; and both of years 5 and 6, cash inflow $60,000.00, cash outflow expenses $38,000.00. I56.00 2 56,00 1. What is the calculated payback period for this proposed investment? PP = Initial investment Average Annual net cash retums A you 5 bo (352 1.b. If the required payback period for your firm is 6 years, would you purchase this machine? Why or why not? 2. What is the calculated simple rate of return for this proposed investment? 2.b. If the required simple rate of return for your firm is 8%, would you purchase this machine? 3. Assume your firm can lock in a cost of Debt for this project at 7% 0.07) annual rate. Also, assume the stockholders in your firm expect a return on equity that is 1 percentage point higher than the cost of debt. 3.a. Explain why the cost of equity for a proposed project like this would be higher than the cost of debt. 3.b. Your firm expects to finance this machine using 25% equity, and 75% debt. Calculate the weighted cost of capital that would be used in for an NPV analysis given these facts. 4. Calculate the net present value of this investment using the NPV function in Excel using the weighted cost of capital that you calculated in 3.b. Staple a printout of both the results and cell formulas to this sheet. 4.b. Assuming the cash flow projections are all correct, and you can lock in" your weighted cost of capital for the life of the project, would this project have a positive or negative impact on your companies' wealth? 5. Calculate the Internal Rate of Return on this investment using the IRR function in Excel. Staple a printout of both the results and cell formulas to this sheet, 5.b. Could this proposed capital investment generate more than one possible IRR? Explain why or why not

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