Answer to Question #12558 in Finance for jasonwilliams

Question

abc ltd is considering whether to invest $900,000 in the purchase of new item of equipment in 2012. the equipment would be paid for with a down payment of $600,000 and the payment of the remaining $300,000 six weeks later the company has already spent 80000 on design and feasibility work, and the operational management team are keen to purchase the the equipment quickly. the equipment is expected to have a life fo three years, after which time it should have a resale value of $50,000. the equipment will be depreciated by the straight-line method over three years. it has been estimated that an investment of $200,000 in working capital must be maintained at all times, but this investment is fully recoverable at the end of the useful life. as a result of acquiring the equipment, it is expected that there will be an increase in annual cash profits, as follows:

2012: $370,000 2013: $480,000 2014: $260,000
the company cost of capital is 10%

How to calculate the Net present value And Internal rate of return

Answer 1

NPV = -(900,000 300,000 80,000) (370,000 - 200,000)/0.1 (480,000 -
200,000)/0.1^2 (260,000 - 200,000 50,000 600,000)/0.1^2

IRR is the
cost of capital, for which this NPV will be equal 0.