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A new computer system will require an initial outlay of $19,000, but it will increase the firm's cash flows by $3,800 a year for each of the next 8 years. a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 9%. Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. $ ./01% Net present value £. 2,032.31 Worth installing es b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 14%. Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. $ L/01% Net present value - P (1 .372.3’2 Worth installing 0 c. How high can the discount rate be before you would reject the project? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Maximum discount v/ -1% o rate 11.81 Explanation: Some values below may be shown as rounded for display purposes, though unrounded numbers should be used for the actual calculations. a. NPV9%= —$19,000 + [$3,800 x Annuity factor (9%, 8 periods)] i | 1 i = - 519000 + 53800 X |ghy— ok $203231 At a required rate of returns of 9%, the project has a positive NPV and should be accepted. b. NPV14%= —$19,000 + [$3,800 x Annuity factor (14%,8 periods)] = 1 _ 1 - _ = - $19.000 + $3800 X | gla= grkrhy= - $137232 At a required rate of returns of 14%, the project has a negative NPV and should be rejected. c. IRR = discount rate (r), which is the solution to the following equation: L _l = = = ) $3,800 x [; rX(l+1) $19,000 = r= IRR = 11.81% [Using a financial calculator, enter PV = (=)19,000; PMT = 3,800; FV = 0; n = 8, compute i.] The project will be rejected for any discount rate above this rate.
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