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.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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P10-10 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.
Transcribed Image Text:P10-10 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.
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