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149. The Zone Company is considering the purchase of a new machine at a cost of $1,040,000.
The machine is expected to improve productivity and thereby increase cash inflows by $250,000
per year for 7 years. It will have no salvage value. The company requires a minimum rate of return
of 12 percent on this type of capital investment. (Ignore income taxes for this problem.)
Required:
1. Determine the net present value (NPV) of the investment proposal. (The PV annuity factor for
12%, 7 years is 4.564.)
2. Determine the proposal's internal rate of return (IRR), rounded to the nearest tenth of a
percent. (
Note
: PV annuity factors for 7 years: @ 10% = 4.868; @ 11% = 4.712; @ 12% = 4.564; @
13% = 4.423; @ 14% = 4.288; @ 15% = 4.160; and, @ 20% = 3.605.)
3. What is the estimated payback period for the proposed investment, under the assumption that
cash inflows occur evenly throughout the year? Round your answer to 2 decimal places.
4. What is the present value payback period for the proposed investment? Round your answer to
2 decimal places.
5. What is the estimated accounting rate of return (on initial investment) for the proposed
project? Round your answer to 1 decimal place, e.g., 0.1224 = 12.2%.
150. Said Company is considering the purchase of a new piece of equipment for $45,000. The
projected after-tax net income associated with this investment is $3,000 for each of the next
three years. The company uses straight-line depreciation. The machine has a useful life of 3
years and no salvage value. Management of the company considers a 12% return on investment
to be satisfactory.
Required:
1. What is the discounted payback period for this investment? (The appropriate discount factors
for 12% are as follows: Year 1 = 0.893; Year 2 = 0.797; and Year 3 = 0.712.)
2. What is the estimated net present value (NPV) of this proposed investment?
151. George's Garage is considering purchasing a machine for $75,000. The machine is
expected to generate a net after-tax income of $11,250 per year. This machine is to be
depreciated over a 10-year period with no residual value.
Required:
What is the payback period, in years, for this machine? (Assume that the cash inflows from this
investment occur evenly throughout the year.)
152. National Rodeo Association, a not-for-profit organization, is considering purchasing a
new enterprise software system for $90,000. This investment is projected to have an eight-year
useful life, and a salvage value of $8,800. Its anticipated eight-year life is projected to save the
organization approximately $18,000 each year in operating costs. In addition, the association
needs an increase of $5,000 in net working capital (other than cash) in the first year, which will
not be released (that is, converted back to cash) until the end of eight years.
Required:
1. What is the payback period for this proposed investment? (Assume that the cash flows, other
than salvage value, occur evenly throughout the year. Also, round your answer to 2 decimal
places, e.g., 2.452 years = 2.45 years.)
2. If the Association has a required rate of return of 10 percent, what is the net present value
(NPV) of this investment? Round your calculation to whole dollars (i.e., zero decimal points). (The
PV annuity factor for 10%, 8 years is 5.335, while the PV $1 factor for 10%, 8 years is 0.467.)
3. What is the estimated internal rate of return (IRR) on this project (to the nearest whole
percent)? (Note: The following present value factors are taken from the present value tables in
Appendix C of Chapter 12, for an 8-year period. This information is needed to answer the
question.)
@ 10% @ 11% @12% @13%
PV $1 discount factor 0.467 0.434 0.404 0.376
PV annuity factor 5.335 5.146 4.968 4.799
153. Megan Inc. has a policy of not accepting any investment proposal that requires more than
three years to payback. The company is considering the purchase of new drafting equipment for
$630,000. The equipment has an estimated useful life of seven years. Megan will use straight-
line depreciation for this asset, with no salvage value. Megan's income tax rate is approximately
25%.
Required:
Determine the required before-tax savings for the drafting equipment to meet the company's
payback requirement.
154. Durable Inc. is considering replacing an old drilling machine that cost $200,000 six years
ago with a new one that costs $450,000. Shipping and installation cost an additional $60,000. The
old machine has been depreciated using the straight-line (SL) method with no salvage value over
an estimated 8-year useful life. The old machine can be sold for $40,000 now or $10,000 in two
years. Management expects increases in inventories of $10,000, accounts receivable of $32,000,
and accounts payable of $12,000 if the new machine is acquired. Durable's income tax rate is
expected to be 30 percent over the years affected by the investment.
Required:
What is Durable's net initial investment (i.e., its after-tax initial cash outlay for the machine)?
155. Fieldgard Inc. invested $800,000 in a project nine years ago. This project has generated
$320,000 cash revenues per year and incurred $250,000 cash operating costs each year. The
project qualified as 7-year property under MACRS (modified accelerated cost recovery system).
Salvage value of this project (at the end of the tenth, and final, year of the project's life) is
expected to be $200,000. The project required $80,000 net additional working capital at its
inception and another $60,000 at the end of year 5. The combined increased working capital
commitment is expected to be fully recoverable when the project terminates. The company is
subject to a combined 40% income tax rate.
Required:
What is the expected total after-tax cash flow expected from this project next year (i.e., during
the 10th and final year of the project's life)?
156. Six years ago, Nebrow Inc. purchased a polishing machine for $600,000. The company
expected to use the machine for 10 years with no residual value at the end of the tenth year. The
machine has been generating annual cash revenue of $460,000 and incurring annual cash
operating costs of $210,000. Nebrow is considering the purchase of a new digital polishing
machine for $800,000, which will have annual cash revenues of $690,000 and annual cash
operating costs of $180,000. The new machine is expected to have a useful life of four years. The
company uses the straight-line depreciation method with no salvage value to depreciate all of its
assets. Assume, for purposes of analysis, that Nemrow is subject to a combined 40% tax rate.
Required:
What is the annual incremental after-tax cash flow from the new polishing machine?
157. Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor
purchased years earlier, which currently has no salvage value; the new tractor has an estimated
useful life of five years with no disposal value or anticipated cost of disposal. The company uses
straight-line depreciation with no residual value on all equipment. Solich is subject to a 40%
income tax rate. The company uses a 12% hurdle rate for evaluating capital investment projects.
The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is
0.567.
Required:
1. Compute the amount of annual before-tax savings that must be generated by the new tractor
to have a payback period of 3 years.
2. Compute the amount of before-tax savings that must be generated by the new tractor to have
an NPV of $500,000 at a discount rate of 12%. (Round your answer to the nearest whole dollar
amount.)
3. Compute the amount of before-tax savings that must be generated by the new tractor to have
an IRR of 12%.
158. Grey Inc. is considering purchasing a machine for $50,000, which is expected to generate
an annual after-tax income of $10,000 and is to be depreciated over 5 years with no residual
value.
Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the payback
period for this machine? (Round answer to one decimal point.)
2. Based on the initial investment outlay, what is the anticipated accounting rate of return (ARR)
on this investment?
3. What is the anticipated internal rate of return (IRR) on this investment? (Note: To answer this
question, you will need to have access to Excel or the present value tables presented as
Appendix C to Chapter 12.)
4. Assume a discount rate (i.e., cost of capital) of 15%:
159. Green Leaf Inc. is considering the purchase of a new piece of equipment for $30,000. The
projected after-tax net income per year on this investment is estimated to be $5,000. The firm
uses straight-line depreciation. This asset is expected to have a useful life of 5 years and no
salvage value at the end of its useful life. Management of the company estimates that its
weighted-average cost of capital (WACC) is 10%. The present value factor for 10%, 5 years =
0.621, while the present value annuity factor for 5 years at 10% is 3.791.
Required:
1. What is the estimated net present value (NPV) of the machine?
2. What is the profitability index (PI) for this proposed investment? (Round your answer to two
decimal places.)
3. For what purpose is the profitability index (PI) useful, in a capital budgeting context?
4. Use the built-in function in Excel to estimate this project's internal rate of return (IRR).
5. Use the built-in function in Excel to estimate the project's modified internal rate of return
(MIRR) under the assumption that the interim cash flows from the investment generate a rate of
return of: (a) 10%, and (b) 20%.
6. How does the MIRR measure differ from the conventional IRR calculation?
