Bob Jensen Inc. purchased a $580,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation. Jensen uses a 10% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows: Year Pretax Cash Inflow 1 $ 58,000 2 71,000 3 107,000 4 178,000 5 214,000 6 268,000 7 241,000 8 214,000 9 107,000 10 71,000 Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply. Required: Using Excel, compute the following for the proposed investment: 1. The payback period, under the assumption that the cash inflows occur evenly throughout the year. (Do not round intermediate calculations. Round your final answer to 1 decimal place.) 2. The accounting (book) rate of return based on (a) initial investment, and (b) average investment. (Round your final answers to 1 decimal place.) 3. The net present value (NPV). (Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.) 4. The present value payback period of the proposed investment under the assumption that the cash inflows occur evenly throughout the year. (Note: use the formula at the bottom of Appendix C, Table 1 to calculate present value factors.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.) 5. The internal rate of return (IRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) 6. The modified internal rate of return (MIRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) (In conjunction with this question, you might want to consult either of the following two references: MIRR Function and/or IRR in Excel.)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Bob Jensen Inc. purchased a $580,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line
| Year | Pretax |
|||
| 1 | $ 58,000 | |||
| 2 | 71,000 | |||
| 3 | 107,000 | |||
| 4 | 178,000 | |||
| 5 | 214,000 | |||
| 6 | 268,000 | |||
| 7 | 241,000 | |||
| 8 | 214,000 | |||
| 9 | 107,000 | |||
| 10 | 71,000 | |||
Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses straight-line depreciation. Assume, for simplicity, that MACRS depreciation rules do not apply.
Required:
Using Excel, compute the following for the proposed investment:
1. The payback period, under the assumption that the cash inflows occur evenly throughout the year. (Do not round intermediate calculations. Round your final answer to 1 decimal place.)
2. The accounting (book)
3. The
4. The present value payback period of the proposed investment under the assumption that the cash inflows occur evenly throughout the year. (Note: use the formula at the bottom of Appendix C, Table 1 to calculate present value factors.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
5. The
6. The modified internal rate of return (MIRR). (Do not round intermediate calculations. Round your final answer to 1 decimal place.) (In conjunction with this question, you might want to consult either of the following two references: MIRR Function and/or IRR in Excel.)
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