Question

Cost of new machinery $200,000 Machinery estimated useful life 10 years Estimated salvage value $0 Straight-line...

Cost of new machinery $200,000
Machinery estimated useful life 10 years
Estimated salvage value $0
Straight-line depreciation
Annual labor hours reduction 10,000
Annual operating costs reduction $4,000
Average hourly labor rate $5.50
Income tax rate 40%
Discount rate 10%

Part 1: Calculate the annual incremental income after taxes and the annual net cash flow for each year

Part 2: Calculate the payback period

Part 3: Calculate the rate of return on average investment

Part 4: Calculate the net present value

Part 5: Calculate the internal rate of return

Part 6: Calculate the profitability index

Please show formulas!

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Answer #1

A C D $200,000 10 $0 $20,000 10,000 Given in question $4,000 $5.50 40% 10% 8 B 1 Cost of new machinery 2 Machinery estimated

A B с D 23 24 Part 4 Cumulative Discount Factor for 10% for 10 years Present Value of Annual Net Cash Flow Net Present Value

Note:

Internal Rate of Return is computed using extrapolation method. To find the IRR accurately, excel function IRR can be used as = IRR(-initial investment, cash flow in year 1, ...., cash flow in year 10) which will be 17.30%

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