Norberto Garcia, general manager of the Argentinean subsidiary of InnovationInc., is considering the purchase of new industrial equipment to improve efficiency at its Cordoba plant. The equipment has an estimated useful life of nine years. The estimated cash flows for the equipment are shown in the table thatfollows, with no anticipated change in working capital. Innovation has a 16% required rate of return. Assume amortization is calculated on a 

straight-line basis. Assume all cash flows occur at year-end except for initial investment amounts.

 

Requirements

1.

Calculate(a) net presentvalue, (b) paybackperiod, and(c) internal rate of return.

2.

Compare and contrast the capital budgeting methods in requirement 1.

3.

The controller of Innovation Inc. received Garcia's estimates but adjusted them to capture the added risk of doing the project in Argentina. Recalculate item 1 with a required rate of return of 22% and explain if the project will be 

approved by Innovation Inc. for its Argentinean subsidiary

 

Initial investment $185,000

Annual cash flows from operations (excluding the amortization effect) $50,000

Cash flow from terminal disposal of equipment $0

Present Value of $1

Period

12%

14%

16%

18%

20%

22%

24%

26%

28%

1

0.893

0.877

0.862

0.847

0.833

0.820

0.806

0.794

0.781

2

0.797

0.769

0.743

0.718

0.694

0.672

0.650

0.630

0.610

3

0.712

0.675

0.641

0.609

0.579

0.551

0.524

0.500

0.477

4

0.636

0.592

0.552

0.516

0.482

0.451

0.423

0.397

0.373

5

0.567

0.519

0.476

0.437

0.402

0.370

0.341

0.315

0.291

6

0.507

0.456

0.410

0.370

0.335

0.303

0.275

0.250

0.227

7

0.452

0.400

0.354

0.314

0.279

0.249

0.222

0.198

0.178

8

0.404

0.351

0.305

0.266

0.233

0.204

0.179

0.157

0.139

9

0.361

0.308

0.263

0.225

0.194

0.167

0.144

0.125

0.108

10

0.322

0.270

0.227

0.191

0.162

0.137

0.116

0.099

0.085

Present Value of Annuity of $1

Period

12%

14%

16%

18%

20%

22%

24%

26%

28%

1

0.893

0.877

0.862

0.847

0.833

0.820

0.806

0.794

0.781

2

1.690

1.647

1.605

1.566

1.528

1.492

1.457

1.424

1.392

3

2.402

2.322

2.246

2.174

2.106

2.042

1.981

1.923

1.868

4

3.037

2.914

2.798

2.690

2.589

2.494

2.404

2.320

2.241

5

3.605

3.433

3.274

3.127

2.991

2.864

2.745

2.635

2.532

6

4.111

3.889

3.685

3.498

3.326

3.167

3.020

2.885

2.759

7

4.564

4.288

4.039

3.812

3.605

3.416

3.242

3.083

2.937

8

4.968

4.639

4.344

4.078

3.837

3.619

3.421

3.241

3.076

9

5.328

4.946

4.607

4.303

4.031

3.786

3.566

3.366

3.184

10

5.650

5.216

4.833

4.494

4.192

3.923

3.682

3.465

3.269

Course- Cost Accounting