A new computer system will require an initial outlay of $20,500, but it will increase the firm’s cash flows by $4,800 a year for each of the next 6 years. a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 8%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 13%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

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Asked Feb 6, 2020
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A new computer system will require an initial outlay of $20,500, but it will increase the firm’s cash flows by $4,800 a year for each of the next 6 years.

 

a. Calculate the NPV and decide if the system is worth installing if the required rate of return is 8%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

b. Calculate the NPV and decide if the system is worth installing if the required rate of return is 13%. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

 

 
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Expert Answer

Step 1

The difference between the future cash inflows and future cash outflows will be regarded as net present value at a given required rate of return.

Given information:

Initial cash outlay is -$20,500

Cash inflows for each of the next 6 years will be $4,800

Discount rate is 8%

Step 2

Calculations:

(a)

Finance homework question answer, step 2, image 1

Step 3

Answer:

The NPV is $1,564.65

Interpretation:

At the given required rate of return, it is worth...

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