Graded 22-1 Question 4 - Please fill in blanks.
4. Alto Clinic plans to purchase a new centrifuge machine for its Massachusetts facility. The machine costs $333,000 and is expected to have a useful life of 5 years, with a terminal disposal value of $33,000. Savings in cash operating costs are expected to be $100,000 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 $16,000 needs to be maintained at all times, but this investment is fully recoverable (will be "cashed in") at the end of the useful life. Alto Clinic's required rate of return is 14%. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Alto Clinic uses straight-line depreciation for its machines. Present Value of $1 table Present Value of Annuity of S1 tablete Future Value of $1 table20 Future Value of Annuity. of $1 table21 Read the requirements22 Requirement 1. Calculate net present value. (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.) The net present value is Requirement 2. Calculate internal rate of return. (Use a trial-and-error approach and straight-line interpolation as necessary. Round all present value calculations to the nearest whole dollar and round the IRR to two decimal places, X.XX%.) The internal rate of retum (IRR) is %. Requirement 3. Calculate accrual accounting rate of return based on net initial investment. (Round interim calculations to the nearest whole dollar. Round the final rate to two decimal places, X.XX%.) Based on net initial investment, the accrual accounting rate of return (AARR) is %. Requirement 4. Calculate accrual accounting rate of return based on average investment. (Round interim calculations to the nearest whole dollar. Round the final rate to two decimal places, X.XX%.) Based on average investment, the accrual accounting rate of return (AARR) is %. Requirement 5. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods? If your decision is based on the DCF model, the purchase (1) (2) and the internal rate of return (3) made because the net present value is the required rate of return. You may be reluctant to (4) the machine if you believe that your performance may actually be measured using (5) This approach would show a return on the initial investment that (6) the required rate. 4. Alto Clinic plans to purchase a new centrifuge machine for its Massachusetts facility. The machine costs $333,000 and is expected to have a useful life of 5 years, with a terminal disposal value of $33,000. Savings in cash operating costs are expected to be $100,000 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 $16,000 needs to be maintained at all times, but this investment is fully recoverable (will be "cashed in") at the end of the useful life. Alto Clinic's required rate of return is 14%. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Alto Clinic uses straight-line depreciation for its machines. Present Value of $1 table Present Value of Annuity of S1 tablete Future Value of $1 table20 Future Value of Annuity. of $1 table21 Read the requirements22 Requirement 1. Calculate net present value. (Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.) The net present value is Requirement 2. Calculate internal rate of return. (Use a trial-and-error approach and straight-line interpolation as necessary. Round all present value calculations to the nearest whole dollar and round the IRR to two decimal places, X.XX%.) The internal rate of retum (IRR) is %. Requirement 3. Calculate accrual accounting rate of return based on net initial investment. (Round interim calculations to the nearest whole dollar. Round the final rate to two decimal places, X.XX%.) Based on net initial investment, the accrual accounting rate of return (AARR) is %. Requirement 4. Calculate accrual accounting rate of return based on average investment. (Round interim calculations to the nearest whole dollar. Round the final rate to two decimal places, X.XX%.) Based on average investment, the accrual accounting rate of return (AARR) is %. Requirement 5. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods? If your decision is based on the DCF model, the purchase (1) (2) and the internal rate of return (3) made because the net present value is the required rate of return. You may be reluctant to (4) the machine if you believe that your performance may actually be measured using (5) This approach would show a return on the initial investment that (6) the required rate
