b. NPV (Net Present Value) $6,160 (%i = 11%, n = 5) = $22,767 ?????? How did we got that? $ 22,767 Present value of inflows 25,000 Present value of outflows $(2,233) Net present value IRR (Internal Rate of Return) Calculator: PV = $25,000 FV = 0 PMT = $6,160 %i N = 5 Compute: %i = 7.38%
c. Debby should not buy this new equipment because the net present value is negative and the internal rate of return is less than the cost of capital. The answer assumes that Debby’s probability distribution of the possible outcomes is accurate.