Question

Chicago Hospital, a taxpaying entity, estimates that it can save $33,000 a year in cash operating costs for the next 8 years if it buys a special-purpose eye-testing machine at a cost of $140,000. No terminal disposal value is expected. Chicago Hospital's required rate of return is 14%. Assume all cash flows occur at year-end except for initial investment amounts. Chicago Hospital uses straight-line depreciation. The income tax rate is 31% for all transactions that affect income taxes. Present Value of $1 table Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Read the requirements. Requirement 1. Calculate the following for the special-purpose eye-testing machine: a. Net present value (NPR) (Round interim calculations and your final answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) The net present value is $ 1 Requirements 1. Calculate the following for the special-purpose eye-testing machine: a. Net present value b. Payback period Internal rate of return d. Accrual accounting rate of return based on net initial investment e. Accrual accounting rate of return based on average investment 2. How would your computations in requirement 1 be affected if the special-purpose machine had a $15,000 terminal disposal value at the end of 8 years? Assume depreciation deductions are based on the $140,000 purchase cost and zero terminal disposal value using the straight-line method. Answer briefly in words without further calculations.

Answer 1

B10 1 x fc la A B C annual savings in cash costs annual depreciation annual net income before tax tax expense annual net income depreciation annual cash flows $ 33,000 $ 17,500 $ 15,500 $ 4,805 $ 10,695 $ 17,500 $ 28,195 annual cash flows present value annuity factor (14%, 8 periods) present value of annual cash flows cost of machine net present value $ 28,195 4.63886 $ 130,793 $ 140,000 -$ 9,207 note - I have used the table value rounded to 5 decimals. In case your table has rounding off of 4 decimals, the net present value would be -$9,206 payback period internal rate of return accrual accounting rate of return based on net initial investment lel accrual accounting rate of return based on average investment 4.97 years 12% 7.64% 15.28% 1d

2 Term Terminal disposal value is a cash inflow. It shall increase the net present value. It won't effect the payback period. It shall increase the internal rate of return. It won't effect the accrual accounting rate of return based on net initial investment. It shall decrease the accrual accounting rate of return based on average investment.

for formulas and calculations, refer to the image below -

B10 X fc la annual savings in cash costs annual depreciation annual net income before tax tax expense annual net income depreciation annual cash flows 33000 =(140000/8) =E2-E3 =E4*0.31 =E4-E5 =E3 =E6+E7 annual cash flows present value annuity factor (14%, 8 periods) present value of annual cash flows cost of machine net present value =E8 =ROUND(-PV(14%,8,1),5) =ROUND(E10*E11,0) 140000 =E12-E13 note - I have used the table value rounded to 5 decimals. In case your table has rounding off of 4 decimals, the net present value would be -$9,206 years payback period =140000/E8 internal rate of return =RATE(8,E8,-E13) 1d accrual accounting rate of return based on net initial investment =E6/140000 lel accrual accounting rate of return based on average investment i