Question

New equipment purchase, income taxes. Ella's Bakery plans to purchase a new oven for its store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no anticipated change in working capital. Ella's Bakery has a 14% after-tax required rate of return and a 35% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes using the initial investment in the oven and its estimated terminal disposal value. Assume all cash flows occur at year-end except for initial investment amounts. Home Insert Page Layout А Formulas Data Review View ТВ Тc TD E F Relevant Cash Flows at End of Each Year 2 3 ($186,000 Initial oven investment Annual cash flow from operations (excluding the depreciation effect) Cash flow from terminal disposal of oven $77,000 $77,000 $77,000 $77,000 $ 6,000 5 Required: 1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. 2. Calculate accrual accounting rate of return based on net initial investment.

Answer 1

Given Discount fachor appliable to Ella's Bakery disounhrt alL the Cash lous t at 14i6 2 Annual Cash tHos -8770d0 Les Imlame fane 357 269 sO Bs0,O50 sn machin 8608-36000 Caesichat value) 4Yrears 4S000 ncome tan Savinendepreciabion 24S0007o 35 Calalabing NP Y esr Yeor YeoY Yecr Yea Inbial Investmet 6000) ASter Tau Cash Alous కoe Sంకం Soo50 add tay Savings on IS750 I$750 ,750 Depreciabors Tesmind value on 600 0 dkpsal machie Year క్కకలు 65,800 71,800 U8e poR) 6580 o.769 o.675 PNe127 o877 0.S72 50,600 S7,707 CS Scanned with 86000) GamScanner9,223 42 506 B 216 E!

9,223 SEY NPU Tetal Indeshmert Pay back ach Year Cash Intlos aftr $ 186000 2-83 Year Conded 186000 Invested at inib stage tpofect Y) x 6500 PAFAL 6రిరి - So PA 6oes he Sing Excel RR 16.32 For Accounting 2, POr pase Achual Tn Gome each Ye woid be 65,809 Buso00 depreciahi $20, g00 AccTUal Accoun i sate retum 20,o 3/86, CS Scanned with CamScanner 1187
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