Question

E21-25 (similar to) Question Help Western Cola is considering the purchase of a special-purpose bottling machine for $45,000. 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.) Western Cola uses a required rate of return of 16% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. X Present Value of $1 table Present Value of Ar i Requirements Data Table Read the requirements Refe rence 1. Net present value. (Use factor amounts roun Calculate the following for the special purpose bottling machine: Year Amount 1. Net present value The net present value is $ $ 1 20,000 2. Payback period Discounted payback period 3. 2 14,000 Internal rate of return (using the interpolation method) 4. 13,000 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 return.) 5. 12,000 4 $ 59,000 Total Print Done Print Done

Answer 1

1. Compute the NPV of the project.
		1.16
Year	Cash Flow	Discount 16%	Discounted cash flows
0	-45,000.00	1.00	-45,000.00
1	20,000.00	0.86207	17,241.38
2	14,000.00	0.74316	10,404.28
3	13,000.00	0.64066	8,328.55
4	12,000.00	0.55229	6,627.49
Net Present Value			-2,398.30
Therefore, NPV of the project is -$2,398.30.

2. Compute the payback period of the project.
Year	Cash Flow	Closing balance
0	-45,000.00	-45,000.00
1	20,000.00	-25,000.00
2	14,000.00	-11,000.00
3	13,000.00	2,000.00
4	12,000.00	14,000.00
Payback period = 2years + (11000/13000) = 2.85 years

3. Compute the discounted payback period of the project.
Year	Cash Flow	Discount 16%	Discounted cash flows	Closing Balance
0	-45,000.00	1.00	-45,000.00	-45,000.00
1	20,000.00	0.86207	17,241.38	-27,758.62
2	14,000.00	0.74316	10,404.28	-17,354.34
3	13,000.00	0.64066	8,328.55	-9,025.79
4	12,000.00	0.55229	6,627.49	-2,398.30
Discounted payback period is beyond life of project (that is 4 years)

4. Compute the IRR of the project.
Compute the NPV at the discount rate of 13%.
Year	Cash Flow	Discount@13%	Discounted cash flows
0	-45,000.00	1.00	-45,000.00
1	20,000.00	0.88496	17,699.12
2	14,000.00	0.78315	10,964.05
3	13,000.00	0.69305	9,009.65
4	12,000.00	0.61332	7,359.82
Net Present Value			32.6455
Therefore, the NPV of the project at discount rate is $32.6455
IRR= LDR+[(present value @LDR-Initial investment)(HDR-LDR)]/[Present value@LDR-present value@HDR]
13%+(((32.6455)/(32.6455-2393.30))*(16-13)%
13.04%

5. Accrual accounting rate of return
Year	Cash Flow	Depreciation	Annual savings
1	20,000.00	11,250.00	8,750.00
2	14,000.00	11,250.00	2,750.00
3	13,000.00	11,250.00	1,750.00
4	12,000.00	11,250.00	750.00
Total	59,000.00	45,000.00	14,000.00
Average annual savings	14750	11250	3,500.00
Accrual accounting rate of return
			=3500/45000
			7.78%