Question

Bob Jensen Inc. purchased a $250,000 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 $58,000 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).

Payback Period = $250000 / $58000 = 4.31 years

2).

Accounting rate of return
Based on Initial Investment = ($58000 - $25000) / $250000 x 100 = 13.20%
Based on Average Investment = $33000 / $125000* x 100 = 26.40%
* Average Investment for 1st year = (0+250000) / 2

3). & 5).

4).

Year	Cash Flows	PV @ 12%	PV	Cumulative PV
0	-250000	1	-250000	-250000.00
1	58000	0.8929	51785.71	-198214.29
2	58000	0.7972	46237.24	-151977.04
3	58000	0.7118	41283.25	-110693.79
4	58000	0.6355	36860.05	-73833.74
5	58000	0.5674	32910.76	-40922.98
6	58000	0.5066	29384.61	-11538.38
7	58000	0.4523	26236.25	14697.88
8	58000	0.4039	23425.23	38123.11
9	58000	0.3606	20915.38	59038.49
10	58000	0.3220	18674.45	77712.94

Discounted Pay Back Period = 6 + 11538.38/26236.25 = 6.44 years

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