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 the company's 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, rounded to nearest whole dollar?
2. What is the profitability index (PI) for this proposed investment, rounded to two decimal places (e.g., 0.4412 = 0.44)?
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), to two decimal places (e.g., 13.568% = 13.57%).
5. Use the built-in function in Excel to estimate the project's modified internal rate of return (MIRR), to two decimal places, 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?

Question

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The Answer of 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 the company's 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, rounded to nearest whole dollar?
2. What is the profitability index (PI) for this proposed investment, rounded to two decimal places (e.g., 0.4412 = 0.44)?
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), to two decimal places (e.g., 13.568% = 13.57%).
5. Use the built-in function in Excel to estimate the project's modified internal rate of return (MIRR), to two decimal places, 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?