Question

Bob Jensen Inc. purchased a $1,150,000 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 $265,000 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.)

Answer 1

ans 1
payback period
intial investment/annual net cah inflow
1150000/265000		4.3	years
ans 2
Accounting rate of return
a initial investment
150000/1150000x100		13.0	percent
net income
265000-1150000/10		150000
b average invetsment		26.1
150000/1150000/2x100
ans 3
NPV
PV of net cash inflows
265000XPVIFA .12,10
265000X5.6502		1497303
LESS INITIAL INVESTMENT		1150000
NPV		347303
AS TABLE NOT PROVIDED TALING DISCOUNT FACTOR UPTO 4 DECIMAL
ans 4
PV of payback period
year 4 plus 51068/88660		4.6	years
year	cash flow	cumulative cash flow	discounted factor
0	-1150000	-1150000	0.8929	($1,026,786)
1	265000	-885000	0.7972	($705,517)
2	265000	-620000	0.7118	($441,304)
3	265000	-355000	0.6355	($225,609)
4	265000	-90000	0.5674	($51,068)
5	265000	175000	0.5066	$88,660
6	265000	440000	0.452349	$199,034
ans 5
IRR is where NPV is 0 we will use trial and error method
lets take 19 percent
PV of net cash inflows
265000XPVIFA .186,10
265000X4.3999		$1,149,818
LESS INITIAL INVESTMENT		1150000
NPV		-182
clsoer to 0
hence IRR is 19 percent
if any doubt please comment