NPV and maximum return DC Fragrance considers purchasing a new fragrance mixing machine for a $245,000 initial investment. The machine generates an annual after-tax cash inflow of $68,500 for five years. a. Determine the net present value (NPV) of the machine, assuming that the firm has a 15% cost of capital. Is the project acceptable? b. If the firm's cost of capital is lower than 15%, does the investment in the machine become more or less desirable? What is the highest cost of capital (closest whole percentage rate) that the firm can have and still find that purchasing the machine is worthwhile? Discuss this finding in light of your response in part a.
NPV and maximum return DC Fragrance considers purchasing a new fragrance mixing machine for a $245,000 initial investment. The machine generates an annual after-tax cash inflow of $68,500 for five years. a. Determine the net present value (NPV) of the machine, assuming that the firm has a 15% cost of capital. Is the project acceptable? b. If the firm's cost of capital is lower than 15%, does the investment in the machine become more or less desirable? What is the highest cost of capital (closest whole percentage rate) that the firm can have and still find that purchasing the machine is worthwhile? Discuss this finding in light of your response in part a.
Chapter9: Capital Budgeting Techniques
Section: Chapter Questions
Problem 12PROB
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