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In: Accounting

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown...

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return

Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below.

Booth Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $960,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow:

Year Cash Revenues Cash Expenses
1 $1,275,000 $900,000
2   1,275,000   900,000
3   1,275,000   900,000
4   1,275,000   900,000
5   1,275,000   900,000

Required:

1. Compute the payback period for the NC equipment. Round your answer to two decimal places.
= 2.56 years

2. Compute the NC equipment's ARR. Round the percentage to one decimal place.
%

3. Compute the investment's NPV, assuming a required rate of return of 10%. Round present value calculations and your final answer to the nearest dollar.
$

4. Compute the investment's IRR.
Between 25% and 30%

Solutions

Expert Solution

1.Payback period = 2.56 Years

Annual Net Cash Inflow = Cash Revenues - Cash Expenses

= $12,75,000 - $9,00,000

= $3,75,000 per year

Payback period = Initial Investment / Annual Net Cash Inflow

= $9,60,000 / $3,75,000

= 2.56 Years

2. NC equipment's ARR =19%

Depreciation expense = $9,60,000 / 5 = $192,000

ARR= [ Net Income / Initial Investments ] x 100

= [1,275,000 - 900,000 - 192,000 ] / 960,000

= [$183,000 / 960,000 ] x 100

=19%

3.Investment's NPV = $4,61,625

Net present value (NPV)= Present Value of Cash Flows – Initial Investment

= [ $3,75,000 x (PAVF 10%,5 Year ] - $9,60,000

= [ $3,75,000 x 3.791 ] - $9,60,000

= $4,61,625

4. Investment's IRR = 27% (Rounded)

Internal Rate of Return Factor          = Net Initial Investment / Annual Cash Flow

                                                = $9,60,000 / $375000 = 2.56

From the Present Value Annuity Factor Table, We can find that the discount rate (IRR) corresponding to the factor of 2.56 for 5 Years Will be 27.45%

Investment's IRR = 27% (Rounded)

ekkarill92 answered 1 year ago
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