E21-25 (similar to) Question Help Burlington Cola is considering the purchase of
ID: 2578708 • Letter: E
Question
E21-25 (similar to) Question Help Burlington Cola is considering the purchase of a special-purpose bottling machine for $80,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs (Click the icon to view the savings in cash operating costs.) Burlington Cola uses a required rate of return o 14% n its capital budgeting decisions. gnore income taxes in your anaysis. Assume all cash flows occur at year-end except or initia nvestment amounts (Click the icon to view the Future Value of $1 factors.) (Click the icon to view the Future Value of Annuity of $1 factors.) (Click the icon to view the Present Value of $1 factors.) Read the requirements 1. Net present value. (Use factor amounts rounded to three decimal places. Round your answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) The net present value is $ (Click the icon to view the Present Value of Annuity of $1 factors.) - X Data Table Requirements Calculate the following for the special purpose bottling machine 1. Net present value 2. Payback period 3. Discounted payback period 4. Internal rate of return (using the interpolation method) 5. Accrual accounting rate of return based on net initial investment (Assume Year Amount $ 35,000 30,000 20,000 12,000 $ 97,000 straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return Total Print Done Print DoneExplanation / Answer
Cost of bottling machine $80,000, Life = 4 years, Dep per annum = $80,000/4 = $20,000 pa
Required:
1. NPV
YEAR
CASH OUTFLOW $
CASH SAVINGS $
DCF @ 14%
PV $
0
(80,000)
1.000
(80,000)
1
35,000
.877
30695
2
30,000
.769
23070
3
20,000
.675
13500
4
12,000
.592
7104
NET PRESENT VALUE
(5631)
IS NEGATIVE, THUS “DO NOT ACCEPT”
YEAR
CASH FLOWS
$
ACCUMULATED
@ YEAR END
PAYBACK PERIOD:
0
(80,000)
(80,000)
1
+35000
(45,000)
2
+30000
(15,000)
3
+20000
+5000
3 YEARS AND 3 MONTHS
4
+12000
+17000
YEAR
CASH FLOWS
$
ACCUMULATED
@ YEAR END
DCF @ 14%
PV
$
PAYBACK PERIOD:
0
(80,000)
(80,000)
1.000
(80000)
1
+35000
(45,000)
.877
(39465)
2
+30000
(15,000)
.769
(11535)
3
+20000
+5000
.675
+3375
3 YEARS 8MTHS
4
+12000
+17000
.592
+10064
YEAR
CASH OUTFLOW $
CASH SAVINGS $
LESS:
DEPRECIATION
0
(80,000)
1
35,000
20000
15000
2
30,000
20000
10000
3
20,000
20000
0
4
NET INVESTMENT = 80000=40000
12,000
20000
(8000)
AVERAGE PROFIT FOR 4 YEARS
$6750
ACCRUAL ACCOUNTING RATE OF RETURN= 6750/80000 X 100 = 8.4375% pa
YEAR
CASH OUTFLOW $
CASH SAVINGS $
DCF @ 14%
PV $
0
(80,000)
1.000
(80,000)
1
35,000
.877
30695
2
30,000
.769
23070
3
20,000
.675
13500
4
12,000
.592
7104
NET PRESENT VALUE
(5631)
IS NEGATIVE, THUS “DO NOT ACCEPT”
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