Question

Briar Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $217,000. The equipment will have an initial cost of $1,217,000 and have an 8-year life. The salvage value of the equipment is estimated to be $217,000. The hurdle rate is 6%. Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.)


a. What is the accounting rate of return? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

b. What is the payback period? (Round your answer to the nearest whole number.)

c. What is the net present value? (Negative amounts should be indicated by a minus sign. Round your answer to nearest dollar amount.)

d. What would the net present value be with a 14% hurdle rate? (Negative value should be indicated by a minus sign. Round your answer to nearest dollar amount.)

e. Based on the NPV calculations, what would be the equipment's internal rate of return? (Round your answer to 2 decimal places.)

Answer 1

Part-a

Accounting rate of return = Annual income / Average Investment

=92000/717000=12.83%

* Annual Income= cash Flow- Depreciaiton

=(217000-(1217000-217000)/8)=92000

* Average Investment = (1217000+217000)/2=717000

Part-b

Payback period= Initial Investment / Annual Cash Flow

=1217000/217000=5.61 year

Part-C- Briar Corp.
Cash Flow		Select Chart	Amount	X	PV Factor@6%	=	Present Value
Annual Net Cash Flows		PVA of $1	$217,000	X	6.20979	=	$1,347,524
Residual value			217000	X	0.62741		$136,148
Initial Investment							-$1,217,000
Net Present Value							$266,672

Part-d
Cash Flow		Select Chart	Amount	X	PV Factor@14%	=	Present Value
Annual Net Cash Flows		PVA of $1	$217,000	X	4.63886	=	$1,006,633
Residual value			217000	X	0.35056		$76,072
Initial Investment							-$1,217,000
Net Present Value							-$134,296