The Zone Company is evaluating a capital expenditure proposal that requires an initial investment of $1,040,000.The machine will improve productivity and thereby increases net after-tax 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.
Required:
(A)Determine the net present value (NPV)of the investment proposal.(The PV annuity factor for 12%,7 years is 4.564. )
(B)Determine the proposal's internal rate of return,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. )
(C)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.
(D)What is the present value payback period for the proposed investment? Round your answer to 2 decimal places.
(E)What is the estimated accounting rate of return (on initial investment)for the proposed project?
Round your answer to 1 decimal place,e.g. ,12.2%.

Question

Quizplus · Accepted Answer

Feedback: 11ea6e70_bd03_8b5a_8f54_d7acc80c2d55_TB1699_00 (B)Present value annuity factor that makes the present value of cash inflows to be equal to the initial investment is $1,040,000/250,000 = 4.160.In the PV annuity table,line 7,a factor of 4.160 corresponds to an interest rate (IRR)of 15%.
If students do not have access to the PV annuity table,then they can use the PV annuity factors provided in the problem and a trial-and-error process to arrive at the same IRR figure (15%).Specifically,they can calculate the NPV of the investment under alternative discount rates.The rate that results in a NPV of zero is,by definition,the IRR of a project. 11ea6e70_bd03_b26b_8f54_bf473ff2a73f_TB1699_00 (C)The estimated payback period for this investment = $1,040,000/$250,000 per year = 4.160 years.
(D)The present value payback period is slightly more than six years,as indicated below: 11ea6e70_bd03_b26c_8f54_09250defe1cc_TB1699_00 Present value payback period = 6.11 years: 6 + ($12,000/$113,000)= 6.11 years
(E)As indicated in the accompanying table,the average increase in annual after-tax accounting income is $101,429.Thus,the ARR of the proposed investment,based on initial investment outlay,is as follows:
ARR = average increase in annual after-tax accounting income/initial investment outlay = $101,429/$1,040,000 = 9.8%

The Zone Company Is Evaluating a Capital Expenditure Proposal That