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Bob Jensen Inc. purchased a $650,000 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. Jensen uses a 10% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows: Pretax Cash Inflow $ 65.000 Year 1. 80.000 120.099 200,000 240,000 300,000 270,000 ,000 7. 240,000 120,000 10 80,000 Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply. Required: Using Excel, compute the following for the proposed investment: 1. The payback period, under the assumption that the cash inflows occur evenly throughout the year. (Do not round intermediate 2 of 2 < Prev Next o search DELL

Answer 1

Solution:

Operating Taxes at inflows 25% Depreciation (A) $ $ Pretax Cash Yr Inflows 0 1 $ 65,000 80,000 120,000 200,000 240,000 300,000 270,000 240,000 120,000 10 80,000 mt 65,000 $ 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 15,000 55,000 135,000 175,000 235,000 205,000 175,000 55,000 15,000 - 3,750 13,750 33,750 43,750 58,750 51,250 43,750 13,750 3,750 operating Cash inflows inflows after after tax tax (B) (A)+(B) $ (650,000) 65,000 11,250 76,250 41,250 106,250 101,250 166,250 131,250 196,250 176,250 241,250 153,750 218,750 131,250 196,250 41,250 106,250 11,250 76,250 Interanal rate of return (IRR) Modified internal rate of return (MIRR) 15.9% 13%

I used IRR & MIRR excel function for computing IRR & MIRR respectively.

For MIRR, reinvestment rate used = 10%