Question

4) The Zone Company is considering the purchase of a new machine machine is expected to improve productivity and thereby increase cas year for 7 years. It will have no salvage value. The company req of 12 percent on this type of capital investment. (Ignore income taxe new machine at a cost of $1,040,000. The and thereby increase cash inflows by $250,000 per divage value. The company requires a minimum rate of return (Ignore income taxes for this problem.) Required: 1. Determine the net present value (NPV) of the proposed inve sent Value (NPV) of the proposed investment. (The PV annuity factor for 12%, 7 years is 4.564.) Round your answer to the nearest whole number. 2. Determine the project's estimated internal rate of ne the project's estimated internal rate of retum (IRR), rounded to the nearest tenth of a percent. (Note: PV annuity factors for 7 years: @ 10% = 4.868; @ 11% = 4.112 4.564; @ 13% = 4.423; @ 14%= 4.288: @ 15% = 4.160; and, @ 20% = 3.605.) 3. What is the estimated payback period for the nanosed investment, under the assumption that cash inflows occur evenly throughout the year? Round your answer to 2 decimal places. 4. What is the estimated accounting rate of return (ARR) (on initial investment) for the proposed project? Round your answer to 1 decimal place, e.g., 0.1224 - 12.2%.

Answer 1

1.

NPV

= Present value of cash inflows - Initial investment

= [Cash inflows x PV annuity factor] - Initial investment

= (250,000 x 4.564) - 1,040,000 = 101,000

2.

When IRR is used as discount rate, NPV = 0

Therefore,

0 = Present value of cash inflows (Using IRR as discount factor) - Initial investment

Or,

Initial investment = Present value of cash inflows (Using IRR as discount factor)

Or,

1,040,000 = 250,000 x PV annuity factor for 7 year @ IRR

Or,

PV annuity factor for 7 year @ IRR = 1,040,000 / 250,000 = 4.16

Using the data given in the question, it can be determined that PV annuity factor for 7 year would be 4.16 when the discount rate is 15%.

Therefore, the IRR is 15%.

3.

Payback period = Initial investment / Cash inflow = 1,040,000 / 250,000 = 4.16 years

4.

ARR = [Cash inflow + Depreciation] / Initial investment = [250,000 + 148,571] / 1,040,000 = 38.3%