Question

Century Lab plans to purchase a new centrifuge machine for its New Hampshire facility. The machine costs $ 225 comma 000 and is expected to have a useful life of 10 ​years, with a terminal disposal value of $ 3 comma 000. Savings in cash operating costs are expected to be $ 48 comma 500 per year.​ However, additional working capital is needed to keep the machine running efficiently. The working capital must continually be​ replaced, so an investment of $ 39 comma 000 needs to be maintained at all​ times, but this investment is fully recoverable​ (will be​ "cashed in") at the end of the useful life. Century Lab​'s required rate of return is 10​%. Ignore income taxes in your analysis. Assume all cash flows occur at​ year-end except for initial investment amounts. Century Lab uses​ straight-line depreciation for its machines.
a. Calculate the net present value.
b. Calculate the internal rate of return
c. Calculate the accrual accounting rate of return based on the net initial investment.
d. Calculate the accrual accounting rate of return based on the average investment.

Answer 1

Answer:

a. Calculate the net present value.

• $49,048

b. Calculate the internal rate of return

• 14%

c. Calculate the accrual accounting rate of return based on the net initial investment.

• see attached spreadsheet

d. Calculate the accrual accounting rate of return based on the average investment.

• 17%

Explanation:

machine cost $225,000

useful life = 10 years

salvage value = $3,000

cash flow per year = $48,500

additional working capital = $39,000

discount rate 10%

I used an excel spreadsheet because is not enough room here:

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