Determination of NPV and Selection of project based on NPV.
A new drill press is considered a possible new investment for EXRON Corporation if it generates an expected return of $2,000 per year for the first five years and $2,500 per year for the last five years. Its expected purchase price (including installation) is $9,400. What is the drill press project's expected internal rate of return?
Suppose that EXRON can borrow the necessary funds in the money and capital markets to make this investment at a cost of 15%. Should it proceed with the project?
If EXRON's investors' required rate of return is 16%, what is the NPV of the drill press project? Based upon your calculation of the NPV should EXRON pursue this project any further?