Question

Jefferson Labs, a nonprofit organization, estimates that it can save $26,000 a year iN cash operating costs for the next 9 years if it buys a special-purpose eye-testing machine at a cost of $125,000. No terminal disposal value is expected. Jefferson Labs' required rate of return is 12%. Assume all cash flows occur at year-end except for initial investment amounts. Jefferson Labs uses straight-line depreciation. Present Value of $1 table Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Read the requirements. Requirement 1. Calculate the following for the special-purpose eye-testing machine: a. Net present value (NPV) (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.) The net present value is $ Requirements 1. Calculate the following for the special-purpose eye-testing machine: a. Net present value b. Payback period c. Internal rate of return d. Accrual accounting rate of return based on net initial investment e. Accrual accounting rate of return based on average investment 2 What other factors should Jefferson Labs consider in deciding whether to purchase the special-purpose eye-testing machine? Enter any number in the edit fields and then click Check Answer. Print Done parts

Answer 1

Calculation of NPV and IRR:

Cash flow PVF 12% Present Value Year (125,000.00)| 1.000 (125,000.00) 0.893 $ 0.797 $ 0.712 $ 0.636 $ 0.567 $ 0.507 $ 0.452 $ 0.404 0.361 $ 23,218.00 1 26,000.00 2 26,000.00 20,722.00 26,000.00 18,512.00 3 4 26,000.00 16,536.00 $ 26,000.00 5 14,742.00 $ 13,182.00 6 26,000.00 $ 26,000.00 7 11,752.00 $ 10,504.00 26,000.00 $ 9,386.00 9 26,000.00 NPV $ 13,554.00 14.79% IRR

Payback period = Initial Investment / annual cash flow
= $125,000 / $26,000
= 4.81 years

Net Income = Annual cash flow - Depreciation
= $26,000 - ($125,000 / 9)
= $26,000 - $13,888.89
= $12,111.11

Accrual rate of return based on net intial investment = Annual Net Income / Initial Investment
= $12,111.11 / $125,000
=- 0.0969 or 9.69%

Accrual rate of return based on average investment
= $12,111.11 / [($125,000 + 0) /2 ]
= $12,111.11 / $62,500
=- 0.1938 or 19.38%

2). Other factors should jefferson consider.
Quantitative and Qualitative factors such as the benefits to customers of a better eye-testing machine, easability and less time consumption in testing and the employee-morale advantages of having up-to-date equipment.
Financing factors should also be considered which involves the availability of funds to purchase the new equipment or is there any need of finanacing and at the rate of financing.