Problem: The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net 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 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return?
c. Should the project be accepted? Why?