Verizon 56%, i.). + 1:24 PM unf.edu @ Problem 4 Hanover, Inc. purchases a machin

Question

Verizon 56%, i.). + 1:24 PM unf.edu @ Problem 4 Hanover, Inc. purchases a machine for $44,000 that has an estimated salvage value of $6,000, and an estimated life of 4 years. The company's required rate of return is 6.5% and its cost of capital is 4.2%. The machine is expected to generate the following cash flows and income over the next 4 years: Year 1 Year 2 Year 3 Year 4 Operating cash flows $15,800 $17,200 $16,500 $15,100 6,300 7,700 7,000 5,600 Exp ress anwers using 3 decimal places. A. Determine the machine's payback period. B. Determine the IRR of the machine. C. Determine the ARR. D. Should the machine be purchased? Why or why not? Problem 5. For each capital budgeting project below indicate whether management should Accept or Reject by

Explanation / Answer

Year 1 Year 2 Year 3 Year 4 Operating cash flows $15,800 $17,200 $16,500 $15,100 Net Income                 6,300               7,700          7,000                  5,600 A Year OCF Cumulative CF 0 -44000 -44000 1 15800 -28200 2 17200 -11000 3 16500 5500 4 15100 20600 Payback period = 2 Years +5500/16500                                    2.33 Years B Year Cash flows 0 -44000 1 15800 2 17200 3 16500 4 21100 IRR 20.96% =IRR( Values 0 to 4) C ARR = Net Income / initial investment Year 1 14.32% =6300/44000 2 17.50% =7700/44000 3 15.91% =7000/44000 4 12.73% =5600/44000 D Yes, since IRR is graeter than the required rate of return

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