Question

Bob Jensen Inc. purchased a $300,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. The net cash inflow is expected to be $69,000 each year for 10 years. Jensen uses a 12% discount rate in evaluating capital investments. Assume, for simplicity, that MACRS depreciation rules do not apply.

Required:

Using Excel (including built-in functions for NPV, IRR, and MIRR), compute the following for the above-referenced investment:

1. The payback period, under the assumption that cash inflows occur evenly throughout the year. (Do not round intermediate calculations. Round your final answer to 1 decimal place.)

2. The accounting (book) rate of return based on (a) initial investment, and (b) average investment. (Round your final answers to 1 decimal place.)

3. The net present value (NPV) of the proposed investment under the assumption that cash inflows occur at year-end. (Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

4. The present value payback period, in years, of the proposed investment under the assumption that cash inflows occur evenly throughout the year. (Note: because of this assumption, the present value calculations will be approximate, not exact.) To calculate present value amounts, use the appropriate factors from Appendix C, Table 1. (Do not round intermediate calculations. Round your final answer to 1 decimal place.)

5. The internal rate of return (IRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.)

6. The modified internal rate of return (MIRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) (In conjunction with this requirement, you might want to consult either of the following two references: MIRR Function and/or IRR in Excel.)

Answer 1

Answer-1

Un adjusted pay back period or if cash inflows occur evenly throughout the year = Initial Investment / annual cash flow

=> Pay back Period = $300000/ $69000 = 4.3478 years or 4.3 years (Round off to 1 decimal)

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Answer-2

Accounting rate of  return = [accounting profit/Investment]*100

Accounting profit = Annual cash flow- Depreciation

Deprecation per year = (Cost-Residual value)/ Useful Life = ($300000-$0)/ 10 year = $30000 per year.

Hence Accounting profit per year = $69000-$30000= $39000

Part-(a)The accounting (book) rate of return based on initial investment

Accounting rate of return based on initial investment = [ Accounting profit/Initial investment]*100

=>Accounting rate of return based on initial investment= [$39000/$300000]*100 = 13%

Part-(b)The accounting (book) rate of return based on average investment.

Average Investment = [ Initial investment+ End period investment]/2

=>Average Investment= [$300000+$0]/2 =$1500000

Accounting rate of return based on average investment = [ Accounting profit/average investment]*100

=>Accounting rate of return based on average investment= [$39000/$150000]*100=26%

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Answer-3

NPV or net present value = PV of the cash inflows - PV of cash outflows

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Answer-4

present value pay back period = A +B/C

A=Last period with a negative discounted cumulative cash flow

B= Absolute value of Discounted cumulative cash flow at the end of period A

C = Discounted cash flow in the period after A.

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Answer-5 & 6

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Answers-

1. Pay back period	4.3 years
2a.The accounting (book) rate of return based on initial investment	13%
2b.The accounting (book) rate of return based on average investment	26%
3. NPV	$89865.4
4.present value pay back period	6.5 years
5.IRR	18.9%
6.MIRR	15.0%