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.

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:

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%

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

Explanation / Answer

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)

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