Pierce Company is considering the purchase of a die cutting machine costing $100,000. The estimated cash benefits

Question:

Pierce Company is considering the purchase of a die cutting machine costing $100,000. The estimated cash benefits before income taxes and the effects of inflation follow:
YearCash Benefit
1.............................$20,000
2............................. 25,000
3............................. 30,000
4............................. 30,000
5............................. 30,000
6............................. 30,000
7............................. 25,000
8............................. 20,000
9............................. 15,000
10........................... 10,000
For financial accounting purposes, the die cutting machine is to be depreciated on a straight-line basis over a period of 10 years, with no expected . For income tax purposes, however, the press will be depreciated under MACRS, using the rates for 7-year property (see Exhibit 22-4 for MACRS rates). The company's tax rate is 40%. The annual inflation rate is expected to be 7% for the planning period.
Required:
Adjust the cash flows for the expected effects of inflation (round the price-level index to three decimal places) and compute each of the following:
(1) in years
(2) Accounting rate of return on the original investment
(3) Accounting rate of return on the average investment
(4) and the index at an assumed 15% Present value payback in years
(6) Net Present Value
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