Question

Bob Jensen Inc. purchased a $740,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. Jensen uses a 10% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows:

Pretax Cash Inflow Year 1 $ 74,000 2 91,000 137,000 228,000 274,000 343,000 309,000 275,000 138,000 92,000 4 10

Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply.

Required:

Using Excel, compute the following for the proposed investment:

1. The payback period, under the assumption that the cash inflows occur evenly throughout the year. (Do not round intermediate calculations. Round your final answer to 1 decimal place.)

2. The accounting (book) rate of return based on (a) initial investment, and (b) average investment. (Round your final answers to 1 decimal place.)

3. The net present value (NPV). (Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

4. The present value payback period of the proposed investment under the assumption that the cash inflows occur evenly throughout the year. (Note: use the formula at the bottom of Appendix C, Table 1 to calculate present value factors.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

5. The internal rate of return (IRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.)

6. The modified internal rate of return (MIRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) (In conjunction with this question, you might want to consult either of the following two references: MIRR Function and/or IRR in Excel.)

Answer 1

6,645 answers

Year	Pre tax Cash Inflow	Less: Depreciation	EBIT	Less Tax	Net Income	Add: Depreciation	Net operating Cash flow
0	-$740,000.00						-$740,000.00
1	$74,000.00	$74,000.00	$0.00	$0.00	$0.00	$74,000.00	$74,000.00
2	$91,000.00	$74,000.00	$17,000.00	$4,250.00	$12,750.00	$74,000.00	$86,750.00
3	$137,000.00	$74,000.00	$63,000.00	$15,750.00	$47,250.00	$74,000.00	$121,250.00
4	$228,000.00	$74,000.00	$154,000.00	$38,500.00	$115,500.00	$74,000.00	$189,500.00
5	$274,000.00	$74,000.00	$200,000.00	$50,000.00	$150,000.00	$74,000.00	$224,000.00
6	$343,000.00	$74,000.00	$269,000.00	$67,250.00	$201,750.00	$74,000.00	$275,750.00
7	$309,000.00	$74,000.00	$235,000.00	$58,750.00	$176,250.00	$74,000.00	$250,250.00
8	$275,000.00	$74,000.00	$201,000.00	$50,250.00	$150,750.00	$74,000.00	$224,750.00
9	$138,000.00	$74,000.00	$64,000.00	$16,000.00	$48,000.00	$74,000.00	$122,000.00
10	$92,000.00	$74,000.00	$18,000.00	$4,500.00	$13,500.00	$74,000.00	$87,500.00
1)	Unadjusted Payback period
Year	Net operating Cash flow	Cumulative Cash Flow
0	-$740,000.00	-$740,000.00
1	$74,000.00	-$666,000.00
2	$86,750.00	-$579,250.00
3	$121,250.00	-$458,000.00
4	$189,500.00	-$268,500.00
5	$224,000.00	-$44,500.00
6	$275,750.00
7	$250,250.00
8	$224,750.00
9	$122,000.00
10	$87,500.00
Payback period = 5+(44500/275750)	5.16	Years
2)
Accounting Rate of Return = Average Net Income/Average Investment
Year	Net Income
1	$0.00
2	$12,750.00
3	$47,250.00
4	$115,500.00
5	$150,000.00
6	$201,750.00
7	$176,250.00
8	$150,750.00
9	$48,000.00
10	$13,500.00
Average Net Income	$91,575.00
Average Investment =($790000+ 0)/2	$395,000.00
ARR = $91575/395000	23.18%
Accounting Rate of Return = Average Net Income/Initial Investment
ARR = $91,575/$790,000	11.59%
3) & 4) 5) & 6)
Year	Operating Cash Flow	PV @ 10%	Present Value
0	-$740,000.00	1	-$740,000.00
1	$74,000.00	0.9091	$67,272.73
2	$86,750.00	0.8264	$71,694.21
3	$121,250.00	0.7513	$91,096.92
4	$189,500.00	0.6830	$129,431.05
5	$224,000.00	0.6209	$139,086.38
6	$275,750.00	0.5645	$155,653.69
7	$250,250.00	0.5132	$128,417.82
8	$224,750.00	0.4665	$104,847.53
9	$122,000.00	0.4241	$51,739.91
10	$87,500.00	0.3855	$33,735.04
		NPV	$232,975.27
		IRR	15.98%
		MIRR	13.05%
Payback period
Year	PV Operating Cash Flow	Cumulative
0	-$740,000.00	-$740,000.00
1	$67,272.73	-$672,727.27
2	$71,694.21	-$601,033.06
3	$91,096.92	-$509,936.14
4	$129,431.05	-$380,505.09
5	$139,086.38	-$241,418.71
6	$155,653.69	-$85,765.03
7	$128,417.82
8	$104,847.53
9	$51,739.91
10	$33,735.04
Payback period = 6 + 85765.03/128417.82	6.67	Years