Kravitz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies,thereby reducing annual cash operating costs (before taxes)by $80,000 for each of the next five years.The company has a minimum rate of return of 8% on all capital investments.The machine will be depreciated using straight-line method over a five-year life with no salvage value at the end of five years.Fritz is subject to a combined 40% income tax rate.
Note: at 8%,the PV annuity factor for five years is 3.993;at 8%,the PV factor for year 1 = 0.926,the PV factor for year 2 = 0.857,the PV factor for year 3 = 0.794,the PV factor for year 4 = 0.735,and the PV factor for year 5 = 0.681.
Required:
1.What is the net present value (rounded to the nearest hundred dollars)of the proposed investment?
What is the present value payback period,in years (rounded to one decimal place,that is,to tenth of a year)?
What is the estimated internal rate of return (IRR)on the proposed investment? Round your answer to one decimal place (i.e. ,tenth of a percent).(Note: to answer this question,you will need access to the tables presented in Chapter 12,Appendix C or to Excel. )

Question

Quizplus · Accepted Answer

Feedback: 1.As shown in the accompanying table (see below),the NPV of this proposed investment,at 8%,is $21,524 ($21,500,rounded).Alternatively,we have: Initial investment outlay = $250,000;After-tax cash inflow per year = increase in after-tax income + depreciation expense = ([$80,000 - $50,000] x [1 - 0.40])+ $50,000 = $18,000 + $50,000 = $68,000;PV of incremental after-tax cash inflows = $68,000 x 3.993 = $271,524;NPV = $271,524 - $250,000 = $21,524 ($21,500,rounded).
2.As indicated in the accompanying table (see below),the PV payback occurs somewhere between years 4 and 5.If we assume that the cash flows occur evenly throughout the year,then the estimated PV payback period (in years)= 4 + ($24,784/$46,308)= 4.535 years (4.5 years if rounded to one decimal point).(Note that this answer is an approximation because the process of calculating present values assumes end-of-period cash flows,when the above interpolation method assumes that cash flows occur evenly throughout the year. )
3.In Table 2,Appendix C,we are looking the interest rate corresponding to an annuity factor of ($250,000/$68,000 = 3.676)in the row corresponding to the life of this project (5 years).We see from Table 2 that the corresponding interest rate is between 11% and 12%.If we used Excel to estimate the project's IRR,we'd get 11.2%,as follows: = IRR({-250000;68000;68000;68000;68000;68000}).Note that the data in the above formula are entered as an array. 11ea6e70_bd0b_2c8f_8f54_57613a7c5c3b_TB1699_00

Kravitz Company Is Planning to Acquire a $250,000 Machine to Improve