Answer:
initial outlay costs of the project = $279,000 (machine) + $30,000 (additional working capital) = $309,000
- CF1 = $63,000
- CF2 = $63,000
- CF3 = $63,000
- CF4 = $63,000
- CF5 = $63,000
- CF6 = $63,000
- CF7 = $63,000 + $50,000 (salvage value) + $30,000 (working capital) = $143,000
discount rate = 10%
using an excel spreadsheet:
1) =NPV(10%,63000,63000,63000,63000,63000,63000,143000) = $347,763 - $309,000 = $38,763
2) =IRR(-309000,63000,63000,63000,63000,63000,63000,143000) = 13.34%
3) accounting rate of return based on net initial investment = average net profit / net initial investment
- average net profit = $63,000 - $32,714 (depreciation cost) = $30,286
- net initial investment = $309,000
accounting rate of return based on net initial investment = $30,286 / $309,000 = 9.8%
4) accounting rate of return based on average investment = average net profit / average investment
- average net profit = $63,000 - $32,714 (depreciation cost) = $30,286
- average investment = ($309,000 + $80,000) / 2 = $194,500
accounting rate of return based on average investment = $30,286 / $194,500 = 15.57%
5) Generally the discounted cash flow method is the most widely accepted way to determine whether a project should be accepted or not, and to be honest the NPV is positive and the IRR is higher than the required rate of return. The only rate that was lower was the accounting rate of return on net investment (9.8%) but it was really close.
If I was the manager that decided whether or not to carry out the project I would go for it.
