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

Question

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. Compute the years payback period for the NC equipment. Round your answer to two decimal places. Craig 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 $640,000. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Compute the payback period for the NC equipment. Round your answer to two decimal places. Compute the NC equipment's ARR. Round your answer to one decimal place. Compute the investment's NPV, assuming a required rate of return of 10 percent. Round present value calculations and your final answer to the nearest dollar.

Explanation / Answer

Craig Company All Amounts in $ Net Income per year Year Revenues Expenses Income 1 850000 600000 250000 2 850000 600000 250000 3 850000 600000 250000 4 850000 600000 250000 5 850000 600000 250000 1. Since the initial outlay is $ 640,000, henee the payback period for the NC equipment will be 2 years ($ 500,000 inflows) 0.56 months (for recovery of $ 140,000) 2.56 years 2. The accounting rate of return (ARR) on the project will be $ 250,000 / $ 850,000 = 29.41% 3. Given that the average rate of return is 10%, the NPV of the NC Equipment works out to $ 279,724.27

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