For this calculation, you may assume even cash flows. 4 LGH Company is considering purchasing a machine to manufacture a new product. Information about the machine follows: 6 Purchase Price $700,000 Method of Depreciation Straight-line 7 Est Salvage Value $50,000 Incremental Revenues (all cash) per year $250,000 8 # Years Useful Life 5 Incremental Expenses (other than deprec.) per yr. $45.000 (All Cash except for depr.) 9 Tax Rate 30% 10 Cost of Capital or Desired Rate of Return 9% 11 Purchase Price is paid today in period "0" 12 13 Instructions: Use Excel (formulas & cell references to make the spreadsheet efficient) to do the following: a. Calculate the Projected/Estimated Annual Income After Tax from purchasing the machine -- the incremental after-tax income. There is no income for time period 0. 15 b. Calculate the Annual Incremental Cash Flows resulting from purchasing the machine. (Use calculations & cell references as needed.) Cash flow for today is the amount paid for the machine today. 16 c. Calculate the Payback Period. (Use calculations & cell references as needed.) 17 d. Calculate the Accounting Rate of Return. (round to 2 decimal places) e. Calculate the Net Present Value. (Use Excel's NPV function - found by clicking on fx) 19 f. Calculate the Internal Rate of Return to two decimal places. (Use Excel's IRR function - found by clicking on fx) 9. Verify your NPV result (not using NPV function): copy the conversion factors from the present value table(s) in the text for compute the factors using formulas) to compute the Net Present Value. 21 22 Parts a & b: Calculate incremental Income after Tax and Cash Flow for each year of the project life. 23 Remember that this project has a projected salvage value that will affect the final year's 24 projected cash flow. c. Payback Period 25 Time Period 26 Year 27 0 1 2 3 5 d. Accounting Rate of Return 28 Cash Revenue 29 Operating Expenses 30 Depreciation Expense 31 Income before Taxes 32 Taxes 30% e. Net Present 33 a. Estimated Net Income Value (use Excel fx NPV) 34 Depreciation Add-Back 35 b. Estimated Cash Flows 36 t. Internal Rate of 37 Return (use Excel fx IRR) 38 39 40 41 9. Calculate NPV using conversion factors from Table #1 in textbook (page B-10 appendix). 42 43 Conversion Factor 1 1 44 Total NPV 45 Present Value Equivalent SO