Question

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Bob Jensen Inc. purchased a $300,000 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. The net cash inflow is expected to be $69,000 each year for 10 years. Jensen uses a 12% discount rate in evaluating capital investments. Assume, for simplicity, that MACRS depreciation rules do not apply. Required: Using Excel (including built-in functions for NPV, IRR, and MIRR), compute the following for the above-referenced investment: 1. The payback period, under the assumption that cash inflows occur evenly throughout the year. (Do not round intermediate calculations. Round your final answer to 1 decimal place.) 2. The accounting (book) rate of return based on (a) initial investment, and (b) average investment. (Round your final answers to 1 decimal place.) 3. The net present value (NPV) of the proposed investment under the assumption that cash inflows occur at year-end. (Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.) 4. The present value payback period, in years, of the proposed investment under the assumption that cash inflows occur evenly throughout the year. (Note: because of this assumption, the present value calculations will be approximate, not exact.) To calculate present value amounts, use the appropriate factors from Appendix C, Table 1. (Do not round intermediate calculations. Round your final answer to 1 decimal place.) 5. The internal rate of return (IRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) 6. The modified internal rate of return (MIRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) (In conjunction with this requirement, you might want to consult either of the following two references: MIRR Function and/or IRR in Excel.) years 0% 1. Unadjusted payback period 2a. ARR based on initial investment 2b. ARR based on average investment 3. NPV 4. Present value payback period 5. Internal rate of return (IRR) 6. Modified internal rate of return (MIRR) years

Answer 1

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Net Cash inflow $69,000 Net Investment $300,000 1 Unadjusted Payback period Investment Average annual inflows $300,000 $69,000 4.3 Years Net Cash inflow Less: Depreciation Net Income $69,000 $30,000 (Cost of Machine /10 years) $39,000 2 a) Accounting Rate of return- Initial investment Average Annual Income $39,000 Initial investment $300,000 13.0% 2b) Accounting Rate of return- Average investment Average Annual Income $39,000 Average Investment $150,000 (Initial Investment/2) 26.0% 20. Calculation of Net present value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 7 Year 9 Year 10 Net Present Value NPV calculated at 12% -$300,000 $69,000 $69,000 $69,000 $69,000 $69,000 $69,000 $69,000 $69,000 $69,000 $69,000 $80,237 4 Present value Payback Period Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 7 Year 9 Year 10 Annual Cash PV factor Discounted Cumulative inflows At 12% Cash inflow Cash inflow $69,000 0.8929 $61,607 $61,607 $69,000 0.7972 $55,006 $116,614 $69,000 0.7118 $49,113 $165,726 $69,000 0.6355 $43,8511 $209,577 $69,000 0.5674 $39,152 $248,730 $69,000 0.5066 $34,958 $283,687 $69,000 0.4523 $31,212 $16,313 $69,000 0.4039 $27,868 $69,000 0.3606 $24,882 $69,000 0.3220 $22,216 0.52 Present value Payback Period 6.5 years Internal Rate of Return 18.9% 6 Modified Internal Rate of Return 15.0%