# Company Abc Needs a Machine for Its Manufacturing Process

Essay by   •  April 13, 2019  •  Coursework  •  301 Words (2 Pages)  •  41 Views

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Company ABC needs a machine for its manufacturing process.

• The cost of the new machine is \$80,700.

• The expected useful life of the machine is 8 years.

• At the end of 8-year period, the machine would have no salvage value.

• After installation, the machine would increase cash inflows by \$30,000 per year.

• Calculate the NPV and IRR of the machine.

• The minimum required rate of return of the company is 12% on all capital investments.

• The cost of capital is 8%.

• Would you accept or reject this investment?

Year Cash Out Cash In (Savings) Discount Factor Discounted Cash Out Discounted Cash In (Savings)

0 \$ 80,700.00 \$ (80,700.00) 1 \$80,700.00 0

1 \$0.00 \$30,000.00 1.12 \$0.00 \$ 26,785.71

2 \$0.00 \$30,000.00 1.254 \$0.00 \$ 23,915.82

3 \$0.00 \$30,000.00 1.405 \$0.00 \$ 21,353.41

4 \$0.00 \$30,000.00 1.574 \$0.00 \$ 19,065.54

5 \$0.00 \$30,000.00 1.762 \$0.00 \$ 17,022.81

6 \$0.00 \$30,000.00 1.974 \$0.00 \$ 15,198.93

7 \$0.00 \$30,000.00 2.211 \$0.00 \$ 13,570.48

8 \$0.00 \$30,000.00 2.476 \$0.00 \$ 12,116.50

Total \$80,700.00 \$149,029.19

NPV \$ 68,329.19

IRR 33%

Based on the calculation, accept the investment

• Straight forward to calculate.

• Widely used analytical tool, used to compare similar alternatives.

• Rely on assumptions and estimates, more room for errors.

• Does not account for unforeseen expenditures.

• Assume constant discount rate overtime, even in real life it may change.

• IRR assumes that all cash flows received from the project are reinvested at the same rate of return

Company ABC needs a machine for its manufacturing process.

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