Question

Help me, please! Thank you! It's important

Date. 1. Metro Clinic, a nonprofit organization, estimates that it can save $30,000 a year in cash operating costs for the next 10 yeacs if it buys a special-purpose eye- testing machine at a cost of $135.000. No terminal disposal valuers expected. Metro Clinic's required rate of return is 12%. Assume all cash flows occur at year-end except for initial investment amounts. Metro Clinic uses straight-line depreciation. Present Value of $1 table Present Value of Annuity.of $1 table Euture Value of $1 table Euture Value of Annuily.of $1 table Read the requirements. Review Only Click the icon to see the Worked Solution. Requirement 1. Calculate the following for the special-purpose eye-testing machine: a. Net present value (NPV) (Use factors to three decimal places, X.XXX., and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.) The net present value is $ b. Payback period (Round your answer to two decimal places.) The payback period is years. c. Internal rate of return (Round the rate to two decimal places, XXX%.) The internal rate of return (IRR) is d. Accrual accounting rate of return based on net initial investment (Round interim calculations to the nearest whole dollar, Round the rate to two decimal places, X.XX%.) % based on net initial investment. The accrual accounting rate of return (AARR) is e. Accrual accounting rate of return based on average investment (Round interim calculations to the nearest whole dollar. Round the rate to two decimal places, XхX*.) % based on average investment. The accrual accounting rate of return (AARR) is Requirement 2. What other factors should Metro Clinic consider in deciding whether to purchase the special-purpose eye-testing machine? OA Financing factors, such as the availability of cash to purchase the new equipment.

Answer 1

Requirement 1:

(a) Net Present Value is $34,500

Calculation:

Initial Investment = $135,000

Annual Savings = $30,000

Life of project = 10 years

Rate of Interest = 12%

NPV = (Annual Savings * Annuity factor of 12% for 10 years) - Initial Investment

= ($30,000 * 5.650) - $135,000

= $169,500 - $135,000

= $34,500

(b) Pay back period is 4.5 years

Calculations :

Payback period = Total outflow / Inflow every Year

= $135,000 / $30,000

= 4.5 years

(c) Internal Rate of return is 18% approx

Calculations :

Let internal rate of return be X

At IRR, Present value of cash inflow is equal to initial cash outflow. It can be written as

Initial investment = Annual Savings * Annuity of X% for 10 years

$135,000 = $30,000 * Annuity of X% for 10 years

Annuity of X% for 10 years = $135,000 / $30,000

Annuity of X% for 10 years = 4.5

Now check for an approximate value of 4.5 in the annuity table at the period of 10 years

The annuity of 18% for 10 years is 4.494 which is approximately equal to 4.5.

(d) Accrual accounting rate of return based on initial investment is 12.22%

Calculations:

Annual Depreciation = $135,000 / 10 years i.e. $13,500

ARR = (annual savings - Annual Depreciation) / Initial Investment

= ($30,000 - $13,500) / $135,000

= 12.22%

(e) Accrual accounting rate of return based on average investment is 24.44%

Calculations :

Average Investment = Initial Investment / 2

= $135,000 / 2 i.e. $67,500

ARR = (annual savings - Annual Depreciation) / Average Investment

= ($30,000 - $13,500) / $67,500

= 24.44%

Requirement 2 :

D. All of the above

Explanation: All the above factors should be considered before purchasing the machinery because they can not be evaluated by the above analysis.