Question
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 agoRelated Solutions
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