Question

Bluebonnet Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Bluebonnet made the following estimates related to the new machinery: EE(Click the icon to view the information.) Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Present Value of $1 table Read the requirements. Requirement 1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return a. Net present value. (Round intermediary calculations to the nearest whole dollar. 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.) Requirements The net present value is S Data Table 1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return Compare and contrast the capital budgeting methods in requirement 1 Cost of the equipment $107,000 Reduced labor costs $35,000 2. Estimated life of the equipment 5 years Terminal disposal value $0 After-tax cost of capital 10% Print Done Tax rate 25 % Assume depreciation is calculated on a straight-line basis for tax purposes Assume all cash flows occur at year-end except for initial investment amounts Print Done

Answer 1

Year Computation of net income and net cash inflows Reduced Labour Depreciation[(107000-35000)/5) Profit before tax CEA-B 35000 14400 35000 14400 35000 14400 35000 14400 35000 14400 Profit after [email protected]% Cash inflows D=C*0.75 20600 15450 29850 20600 15450 29850 20600 15450 29850 20600 15450 298501 20600 15450 29850 Present Value A*B Net Present valueſ n=5 Years & i=10%) Year Cash Flows PV Factor@10% A - 107000 29850 29850 29850 29850 29850 Net Present value 0.909 0.826 0.751 0.683 0.621 - 107000 27136 24669 22427 20388 18535 6155

Payback Period Year Cash Inflows 29850 29850 29850 29850 29850 Amount invested 107000 Year 1 to 3 inflow 89550 Balance to be recovered (107000-89550) in year 4= 17450 Period=3+17450/29850 Period=3+0.585 Payback Period= 3.585 Years

Discounted Payback Period Year Discounted Cash Inflows 27136 24669 22427 20388 18535 AWIN Amount invested 107000 Year 1 to 4 inflow 94620 Balance to be recovered (107000-94620) in year 5= 12380 Period=4+12380/18535 Period=4+0.668 Payback Period= 4.668 Years

Internal rate of return (i,e rate at which discounted cash inflows equal to cash outflows) Net Present value=0 Year Cash Flows Ont in I, e IRR 12% -107000 IRR Fomula=IRR(C65:C70) 29850 29850 29850 29850 29850