The Pam American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The new cost of this machine is $45,000. The annual cash flows have the following projections.
Year Cash flow
1 $15,000
2 $20,000
3 $25,000
4 $10,000
5 $5,000
a. If the cost of capital is 10%, what is the net present value of selecting a new machine?
b. What is the internal rate of return (IRR)?
c. Should the project be accepted? Why?