Chapter 25

# 3 1 30 25 30 30 using a simpler procedure to find the

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1-30 25-30 30 Using a Simpler Procedure to Find the Internal Rate of Return A trial-and-error procedure is time-consuming. To illustrate a simpler procedure, assume that management is considering a proposal to acquire equipment costing \$97,360 . The equipment is expected to provide equal annual net cash flows of \$20,000 for seven years . 3
1-31 25-31 31 Determine the present value factor or an annuity of 1 as follows: \$97,360 \$20,000 = 4.868 Amount to be Invested Equal Annual Cash Flows (continued) 3

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1-32 25-32 32 Find the seven year line on Exhibit 2 (the present value of an annuity of \$1 at compound interest). (continued) 3
1-33 25-33 33 3 3.605

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1-34 25-34 34 Proceed horizontally across the table until you find the present value factor computed in step 1 (or the closest present value factor). 3
1-35 25-35 35 3 3.605

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1-36 25-36 36 Now that you have located 4.868 on the seven year line, go vertically to the top of the table to determine the interest rate. 3
1-37 25-37 37 The internal rate of return for this proposal is 10%. 3 3.605

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1-38 25-38 38 If the minimum acceptable rate of return for similar proposals is 10% or less , then the proposed investment should be considered acceptable. 3
1-39 25-39 39 1 4 List and describe factors that complicate capital investment analysis.

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1-40 25-40 40 1. Income tax 2. Proposals with unequal lives 3. Lease versus purchasing 4. Uncertainty 5. Changes in price levels 6. Qualitative considerations Factors that Complicate Capital Investment Analysis 4
1-41 25-41 41 Income Tax For federal income tax purposes, depreciation on fixed assets can be much shorter than the actual useful lives. Also, depreciation for tax purposes often differs from depreciation for financial statement purposes. 4

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1-42 25-42 42 1. Product quality 2. Manufacturing flexibility 3. Employee morale 4. Manufacturing productivity 5. Market (strategic) opportunities Improvements that increase competitiveness and quality are difficult to quantify. The following qualitative factors are important considerations. Qualitative Considerations 4
1-43 25-43 43
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