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21-23 DCF, accrual accounting rate of return, working capital, evaluation of performance, no income taxes. Century Lab plans to purchase a new centrifuge machine for its New Hampshire facility. The machine costs $137,500 and is expected to have a useful life of 8 years, with a terminal disposal value of $37,500. Savings in cash operating costs are expected to be $31,250 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 $10,000 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 Labs 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. Century Lab uses straight-line depreciation for its machines.

1.)Calculate net present value.

2.)Calculate internal rate of return.

3.)Calculate accrual accounting rate of return based on net initial investment.

4.)Calculate accrual accounting rate of return based on average investment.

5.)You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods?

21-25 New equipment purchase, income taxes. Nikola Inc. is considering the purchase of a new industrial electric motor to improve efficiency at its Rochester plant. The motor has an estimated useful life of 5 years. The estimated pretax cash flows for the motor are shown in the table that follows, with no anticipated change in working capital. Nikola has a 10% after-tax required rate of return and a 30% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur at year-end except for initial investment amounts.

Home Insert Page Layout Formulas Data Review View Relevant Cash Flows at End of Each Year 2 3 Initial motor investment $(75,000) Annual cash flow from operations 4 (excluding the depreciation effect) 5 Cash flow from terminal disposal of motor $25,000$25,000 $25,000 $25,000 $25,000 1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return 2. Compare and contrast the capital budgeting methods in requirement 1