Question

Chicago Cola is considering the purchase of a special-purpose bottling machine for $24,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs: E: (Click the icon to view the savings in cash operating costs.) Chicago Cola uses a required rate of return of 18% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. 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 1. Net present value. (Use factor amounts rounded to three decimal places. Round your answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) The net present value is $ 2. Payback period. (Round your answer to two decimal places.) The payback period is 2.85 years. 3. Discounted payback period. O A. 3.71 XB. 3.64 c. Amount can not be determined OD. 3.85 4. Internal rate of return (using the interpolation method). (Use at 5. Accrual accounting rate of return based on net initial investment (Assume straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of retum.) (Round your final answer to the nearest hundredth of a percent, X.XX%.) The accrual accounting rate of return (AARR) is 7.78%

Answer 1

A	Year	Amount	Discounting Rate	Present Value Factor	Present Value
	1	$ 11,000.00	18%	0.847	$   9,322.03
	2	$   9,000.00	18%	0.718	$   6,463.66
	3	$   7,000.00	18%	0.609	$   4,260.42
	4	$   4,000.00	18%	0.516	$   2,063.16
	Present Value of Future Savings (A)				$ 22,109.27
	Present Investment (B)				$ 24,000.00
	Net Present Value (A-B)				$ -1,890.73
D		Internal Rate of Return
		At 18% PV	22109.27
		Since at 18% PV of Cash savings is less than $24,000 IRR shall be less than 18%
		Let us check PV of Cash savings at 14%
		$ 11,000.00	14%	0.877	$   9,649.12
		$   9,000.00	14%	0.769	$   6,925.21
		$   7,000.00	14%	0.675	$   4,724.80
		$   4,000.00	14%	0.592	$   2,368.32
					$ 23,667.45
		Let us check PV of Cash savings at 13%
		$ 11,000.00	13%	0.885	$   9,734.51
		$   9,000.00	13%	0.783	$   7,048.32
		$   7,000.00	13%	0.693	$   4,851.35
		$   4,000.00	13%	0.613	$   2,453.27
					$ 24,087.46
		Difference for 1% change (C)			$     -420.01
		Increase in PV of Cash Savings (D)			$       332.55
		Reduction in % (D/C)			-0.79%
		IRR			13.21%