Question

Bob Jensen Inc. purchased a $590,000 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 Canh ints Inflow 159,000 73,000 110,000 183,000 5 220,000 275,000 248,000 220,000 110,000 10 73,000 Skipped 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-ine depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply Required: Using Excel, compute the following for the proposed investment 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 decimal place.) 3. The net present value (NPV), (Do not round intermediate calculations, Round your final answer to 4. The present value payback period of the proposed investment under the assumption that the cash inflows occur ev the year. (Note use the formula at the bottom of Appendix C. Table 1 to calculate present value factors 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.) (n conjunction with this question, you might want to consult either of the following two references: MIRR Function and/or IRRin Excel.) oints Skippedc Unadjusted payback period 2a ARR based on initial investment 2b ARR based on average investment 3. İNPV 4 Present value payback periocd 5 Internal rate of retum (IRR) years years Modifed internal rate of retum (MIRR TABLE 1 Present Value of $1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 20% 25% 30% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0893 0.885 0.877 0870 0333 0800 0.769 0.925 0.907 0.890 0.873 0857 0342 0.826 0.812 0.797 0.783 0.769 0.756 0.694 0.640 0592 0.889 0.364 0.840 0816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0658 0579 0.512 0455 4 0855 0.823 0.792 0.763 0.735 0.708 0683 0659 0.636 0.613 0.592 0 572 0.482 0.410 0 350 0.822 0.784 0.747 0.713 0.681 0650 0.621 0.593 0.567 0543 0519 0497 0.402 0.328 0.269 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0535 0.507 0.430 0.456 0.432 0.335 0.262 0.207 0.760 0.711 0665 0.623 0.583 0547 0513 0.4S2 0452 0.425 0400 0376 0.279 0210 0.159 0.731 0677 0627 0532 0540 0502 0.467 0.434 0404 0376 0351 0327 O 233 0163 0123 0.703 0.645 0.592 0.544 0.500 0460 0.424 0.391 0.361 0.333 0.308 0.234 0.194 0.134 0.094 10 0.676 0.614 0.558 0.508 0.463 0422 0.386 0.352 0.322 0.295 0.270 0.247 0.162 0.107 0.073 11 0.650 0.585 0.527 0.475 0.429 03S3 0.350 0.317 0.287 0.261 0.237 0.215 0.135 0086 0.056 12 0625 0.557 0497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.112 0069 0.043 13 0.601 0.530 0469 0415 0.368 0.326 0.290 0258 0229 0204 0182 0163 0093 0055 0033 4 0.577 0.505 0.442 0.338 0.340 0.299 0.263 0.232 0.205 0.11 0 160 0.141 0.078 0044 0025 0555 0431 0417 0362 0315 0275 0239 0209 0183 0.160 0.140 0123 O.065 0035 0020 16 0.534 0.458 0.394 0.339 0.292 0.252 0213 0.133 0.163 0.141 0.123 0.107 0054 0.023 0015 7 0.513 0436 0.371 0.317 0.270 0231 0.198 0,170 0.146 0.125 0108 0093 0045 0023 0012 18 0494 0416 0.350 0.296 0.250 0.212 0.130 0.153 0.130 0.111 0095 0.081 0 038 0018 0.009 19 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0098 0083 0.070 0.031 0014 0.007 20 0.456 0.377 0.312 0.258 0.215 0.173 0.149 0.124 0.104 0.037 0.073 0.061 0.026 0012 0005 22 0422 0342 0278 0226 0184 0.150 0.123 0.101 0083 0068 0056 0 046 0018 0007 0 003 0.390 0.310 0.247 0.197 0.158 0126 0.102 0.032 0.066 0 053 0043 0.035 0013 0.005 0.002 25 0375 0.295 0233 0.184 0.146 0.116 0 092 0074 0059 0047 0038 0.030 0.010 0.004 0.001 30 0.308 0231 0174 0131 0099 0075 0.057 0.044 0.033 0.026 0.020 0.015 0.004 0.001 0.000 0.253 0.181 0.130 0094 0068 0049 0.036 0026 0.019 0014 0010 0.00S 0.002 0.000 0.000 40 0.208 0.142 0097 0067 0046 0032 0022 0015 0011 0.008 0.005 0004 0.001 0000 0.000 3 1 1 l+(1 +0.10)'-0621 Nom The Present value(PV)factorfor NPenods and tate F per Period # 1+(1+,ywhreun ple, de PV factorfor 10%, syean

Answer 1

Year	Pre tax Cash Inflow	Less: Depreciation	EBIT	Less Tax@ 25%	Net Income	Add: Depreciation	Net operating Cash flow
0	-$590,000.00						-$590000.00
1	$59,000.00	$59000.00	$0.00	$0.00	$0.00	$59000.00	$59000.00
2	$73,000.00	$59000.00	$14000.00	$3500.00	$10500.00	$59000.00	$69500.00
3	$110,000.00	$59000.00	$51000.00	$12750.00	$38250.00	$59000.00	$97250.00
4	$183,000.00	$59000.00	$124000.00	$31000.00	$93000.00	$59000.00	$152000.00
5	$220,000.00	$59000.00	$161000.00	$40250.00	$120750.00	$59000.00	$179750.00
6	$275,000.00	$59000.00	$216000.00	$54000.00	$162000.00	$59000.00	$221000.00
7	$248,000.00	$59000.00	$189000.00	$47250.00	$141750.00	$59000.00	$200750.00
8	$220,000.00	$59000.00	$161000.00	$40250.00	$120750.00	$59000.00	$179750.00
9	$110,000.00	$59000.00	$51000.00	$12750.00	$38250.00	$59000.00	$97250.00
10	$73,000.00	$59000.00	$14000.00	$3500.00	$10500.00	$59000.00	$69500.00
1)	Unadjusted Payback period
Year	Net operating Cash flow	Cumulative Cash Flow
0	-$590000.00	-$590000.00
1	$59000.00	-$531000.00
2	$69500.00	-$461500.00
3	$97250.00	-$364250.00
4	$152000.00	-$212250.00
5	$179750.00	-$32500.00
6	$221000.00
7	$200750.00
8	$179750.00
9	$97250.00
10	$69500.00
Payback period = 5+(32500/221000)	5.1	Years
2)
Accounting Rate of Return = Average Net Income/Average Investment
Year	Net Income
1	$0.00
2	$10500.00
3	$38250.00
4	$93000.00
5	$120750.00
6	$162000.00
7	$141750.00
8	$120750.00
9	$38250.00
10	$10500.00
Average Net Income	$73575.00
Average Investment =($590000+ 0)/2	$295000.00
ARR = $91575/395000	24.94%
Accounting Rate of Return = Average Net Income/Initial Investment
ARR = $73,575/$790,000	12.47%
3) & 4) 5) & 6)
Year	Operating Cash Flow	PV @ 10%	Present Value
0	-$590000.00	1	-$590000.00
1	$59000.00	0.9091	$53636.36
2	$69500.00	0.8264	$57438.02
3	$97250.00	0.7513	$73065.36
4	$152000.00	0.6830	$103818.05
5	$179750.00	0.6209	$111610.61
6	$221000.00	0.5645	$124748.74
7	$200750.00	0.5132	$103016.49
8	$179750.00	0.4665	$83854.70
9	$97250.00	0.4241	$41243.49
10	$69500.00	0.3855	$26795.26
		NPV	$189,227
		IRR	16.09%
		MIRR	13.10%
Payback period
Year	PV Operating Cash Flow	Cumulative
0	-$590000.00	-$590000.00
1	$53636.36	-$536363.64
2	$57438.02	-$478925.62
3	$73065.36	-$405860.26
4	$103818.05	-$302042.21
5	$111610.61	-$190431.60
6	$124748.74	-$65682.86
7	$103016.49
8	$83854.70
9	$41243.49
10	$26795.26
Payback period = 6 + 65682.86/103016.49	6.64	Years