Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 51

Basic Capital-Budgeting Techniques; No Taxes, Uniform Net Cash Inflows; Spreadsheets Bob Jensen, Inc., purchased a $650,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. The net cash inflow is expected to be $150,000 each year for 10 years. Jensen uses a 12% discount rate in evaluating capital investments. Assume, for simplicity, that MACRS depreciation rules do not apply.
Required Using Excel, compute the following for the proposed capital investment:
1. The payback period, under the assumption that cash inflows occur evenly throughout the year.
2. The accounting (book) rate of return based on: (a) initial investment, and (b) average investment.
3. The net present value (NPV) of the proposed investment under the assumption that cash inflows occur at year-end.
4. The present value payback period of the proposed investment under the assumption that cash inflows occur evenly throughout the year.
5. The internal rate of return (IRR).
6. The modified internal rate of return (MIRR).