Dunkin lab plans to purchase a new centrifuge machine for its Arizona facility. The machine costs $567,000 and is expected to have a useful life of 8 âyears, with a terminal disposal value of $54,000. Savings in cash operating costs are expected to be $108,000 per year.â However, additional working capital is needed to keep the machine running efficiently. The working capital must continually beâ replaced, so an investment of $38,000 needs to be maintained at allâ times, but this investment is fully recoverableâ (will beâ "cashed in") at the end of the useful life. Dunkin Lab's required rate of return is 8â%. Ignore income taxes in your analysis. Assume all cash flows occur atâ year-end except for initial investment amounts. Dunkin Lab usesâ straight-line depreciation for its machines.
1.
Calculate net present value.
2.
Calculate internal rate of return.
3.
Calculate accrual accounting rate of return based on net initial investment.
4.
Calculate accrual accounting rate of return based on average investment.
5.
You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCFâ methods?
Dunkin lab plans to purchase a new centrifuge machine for its Arizona facility. The machine costs $567,000 and is expected to have a useful life of 8 âyears, with a terminal disposal value of $54,000. Savings in cash operating costs are expected to be $108,000 per year.â However, additional working capital is needed to keep the machine running efficiently. The working capital must continually beâ replaced, so an investment of $38,000 needs to be maintained at allâ times, but this investment is fully recoverableâ (will beâ "cashed in") at the end of the useful life. Dunkin Lab's required rate of return is 8â%. Ignore income taxes in your analysis. Assume all cash flows occur atâ year-end except for initial investment amounts. Dunkin Lab usesâ straight-line depreciation for its machines.
| 1. | Calculate net present value. |
| 2. | Calculate internal rate of return. |
| 3. | Calculate accrual accounting rate of return based on net initial investment. |
| 4. | Calculate accrual accounting rate of return based on average investment. |
| 5. | You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCFâ methods? |
Related questions
Anna's Bakery plans to purchase a new oven for its store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for the oven are as shown in the table thatâ follows, with no anticipated change in working capital. Anna's Bakery has anan 8â% after-tax required rate of return and a 34â% income tax rate. Assume depreciation is calculated on aâ straight-line basis for tax purposes using the initial oven investment and estimated terminal disposal value of the oven. Assume all cash flows occur atâ year-end except for initial investment amounts.
Relevant Cash Flows at End of Each Year
0 1 2 3 4
Initial machine investment $(70,000)
Annual cash flows from operations
(excluding the depreciation effect) $24,000 $24,000 $24,000 $24,000
Cash flow from terminal disposal of oven $7,000
| 1. | Calculateâ (a) net presentâ value, (b) paybackâ period, andâ (c) internal rate of return. Please. |
| 2. | Calculate accrual accounting rate of return based on net initial investment. Please. |
