Question
GreenLab plans to purchase a new centrifuge machine for its Newfoundland facility. The machine costs $158,000 and is expected to have a useful life of
GreenLab plans to purchase a new centrifuge machine for its Newfoundland facility. The machine costs $158,000 and is expected to have a useful life of nine years, with a terminal disposal value of $3,000. Savings in cash operating costs are expected to be $37,500 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 $12,000
needs to be maintained at all times, but this investment is fully recoverable (will be "cashed in") at the end of the useful life. GreenLab's required rate of return is 12%. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts.
Requirement 1. Calculate net present value. (Round amounts to the nearest whole dollar.) PV Factor at Total Present i=12%, n=9 Net Cash Inflow Value Net present value: Present value of annuity of equal annual net cash inflows X per year = Present value of terminal disposal value X = Present value of working capital X = Net initial investment Net present value Requirement 2. Calculate internal rate of return. Use a trialanderror approach and straight-line interpolation as necessary. The IRR (internal rate of return) is %. (Round all present value calculations to the nearest whole dollar and round the IRR to two decimal places, X.XX%.) Requirement 3. Calculate accrual accounting rate of return based on net initial investment. Assume straight-line depreciation. The AARR (accrual accounting rate of return) is %. (Round interim calculations to the nearest whole dollar. Round the nal rate to two decimal places, X.XX%.) Requirement 4. 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 V You may be relucmnt to 'V the machine if you believe that your performance may actually be measured using show a return on the initial investment that V the required rate. made because the net present value is V and the internal rate of return 4. the required rate of return. El. This approach wouldStep by Step Solution
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