a. Calculate the net present value for each investment using the format presented in. (Remember to include the initial investment cash outflow and salvage value in your calculation.) Round to the nearest dollar.
b. Which, if any, investment is preferable? Explain.
Net Present Value, Internal Rate of Return, and Payback Period Analyses. Sherwin Moore Paint Company would like to further automate its production process by purchasing production equipment for $660,000. The equipment is expected to have a useful life of 8 years, and will be sold at the end of 8 years for $40,000. The equipment requires significant maintenance work at an annual cost of $75,000. Labor and material cost savings, shown in the table, are also expected to be significant.
Year 1 $160,000
Year 2 $190,000
Year 3 $200,000
Year 4 $240,000
Year 5 $280,000
Year 6 $220,000
Year 7 $180,000
Year 8 $155,000
The company’s required rate of return is 11 percent. Assume the company requires all investments to be recovered within five years.
Required:
a. Find the net present value of this investment using the format presented in. Round to the nearest dollar.
b. Use trial and error to approximate the internal rate of return for this investment proposal.
c. Determine the payback period for this investment using the format shown in.
d. Based on your findings in requirements a, b, and c, should the company purchase the production equipment? Explain.