Salem Ltd. Is considering the purchase of a new machine that has a purchase price of $1,200,000. Management estimates that the machine will result in a net after-tax cash inflow of $341, 976 per year. The machine will have an estimated useful life of five years and a residual value of $50,000. Salem has a minimum required return for similar investments of 14%. 1. What is the project's NPV? 2. What does the NPV imply about the IRR? a. IRR is definitely less than 14% b. IRR is almost exactly equal to 14% c. IRR is definitely greater than 14% d. No implications can be made about IRR from an NPV calculation.
Salem Ltd. Is considering the purchase of a new machine that has a purchase price of $1,200,000. Management estimates that the machine will result in a net after-tax cash inflow of $341, 976 per year. The machine will have an estimated useful life of five years and a residual value of $50,000. Salem has a minimum required return for similar investments of 14%. 1. What is the project's NPV? 2. What does the NPV imply about the IRR? a. IRR is definitely less than 14% b. IRR is almost exactly equal to 14% c. IRR is definitely greater than 14% d. No implications can be made about IRR from an NPV calculation.
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
Section: Chapter Questions
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Transcribed Image Text:10. NPV and IRR
Salem Ltd. Is considering the purchase of a new machine that has a purchase
price of $1,200,000. Management estimates that the machine will result in
a net after-tax cash inflow of $341, 976 per year. The machine will have an
estimated useful life of five years and a residual value of $50,000. Salem has
a minimum required return for similar investments of 14%.
1. What is the project's NPV?
2. What does the NPV imply about the IRR?
a. IRR is definitely less than 14%
b. IRR is almost exactly equal to 14%
c. IRR is definitely greater than 14%
d. No implications can be made about IRR from an NPV calculation.
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