Answer:
a. Cash payback period: 6.52 years
b. The machine's internal rate of return: 10.93%
c. The machine's net present value using a discount rate of 8%: $33,691
d. The machine's annual rate of return: 14.03%
Explanation:
a. Cash payback period = Investment outlay / Net annual cashflow = 215,000 / 33,000 = 6.52 years
b. Internal rate of return is discount rate that brings net present value of the project to zero. Thus:
-215,000 + (33,000/IRR) x ( 1 - (1+IRR)^-12 ) = 0 <=> IRR = 10.93%
c. The machine's net present value using a discount rate of 8% calculated as:
-215,000 + (33,000/8%) x ( 1 - (1+8%)^-12 ) = $33,691
d. The machine's annual rate of return:
The machine net income = Increase in annual net cash inflow - Depreciation expenses = 33,000 - (215,000/12) = $15,083.33 ( as depreciation is non-cash expenses.
Average investment = ( 215,000 + 0) /2 = $107,500
The machine's annual rate of return= Net Income / Average investment = 15,083.33/107,500 = 14.03%.