# Usearequiredrateofreturnof14 related factsas b

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Unformatted text preview: uy a new Required: coding machine a. Compute the net present value at a 14% required rate of return. to help b. Compute the internal rate of return. control c. Determine the payback period of the investment. Answer: a. Predicted Cash Flows Year(s) PV Factor \$(36,586) 0 1.000 (4,000) 0 1.000 10,000 1-5 3.433 4,000 5 0.519 4,000 5 0.519 PV of Cash Flows Investment Working capital needed Annual operations Working capital returned Salvage value Net present value b. Trial and error is required. Because net present value is negative in part a, the internal rate of return is less than 14%. Start by trying 12%. Investment Working capital needed Annual operations Working capital returned Salvage value Net present value With a zero net present value, the internal rate of return is 12%. c. Payback period = (\$36,586 + \$4,000)/\$10,000 = 4.06 years. Predicted Cash Flows Year(s) PV Factor \$(36,586) 0 1.000 (4,000) 0 1.000 10,000 1-5 3.605 4,000 5 0.567 4,000 5 0.567 PV of Cash Flows Diff: 3 Terms: NPV method, required rate of return (RRR), IRR method, payback Objective: 3, 4 AACSB: Analytical skills 118) Sam's modular buildings. The machine sells for \$75,000 and requires working capital of \$10,000. Its estimated useful life is six Structures years and it will have a salvage value of \$17,560. Recovery of working capital will be \$10,000 at the end of its useful life. desires to Annual cash savings from the purchase of the machine will be \$20,000. buy a new crane and Required: accessorie s to help a. Compute the net present value at a 12% required rate of return. move and b. Compute the internal rate of return. install c. Determine the payback period of the investment. Answer: a. Predicted Cash Flows Year(s) PV Factor \$(75,000) 0 1.000 (10,000) 0 1.000 20,000 1-6 4.111 10,000 6 0.507 17,560 6 0.507 PV of Cash Flows Investment Working capital needed Annual operations Working capital returned Salvage value Net present value b. Trial and error is required. Because net present value is negative in part a, the internal r...
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## This note was uploaded on 09/18/2010 for the course ACCT 424 taught by Professor All during the Spring '10 term at DeVry Long Beach.

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