HORNGREN COST ACCT NON-MAJORS W/ACCESS
HORNGREN COST ACCT NON-MAJORS W/ACCESS
17th Edition
ISBN: 9781323703748
Author: Datar
Publisher: Pearson Custom Publishing
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Chapter 21, Problem 21.28E

DCF, accrual accounting rate of return, working capital, evaluation of performance, no income taxes. Laverty Clinic plans to purchase a new centrifuge machine for its New York facility. The machine costs $94,000 and is expected to have a useful life of 6 years, with a terminal disposal value of $9,000. Savings in cash operating costs are expected to be $24,900 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 $4,000 needs to be maintained at all times, but this investment is fully recoverable (will be “cashed in”) at the end of the useful life. Laverty Clinic’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. Laverty Clinic uses straight-line depreciation for its machines.

  1. 1. Calculate net present value.
  2. 2. Calculate internal rate of return.
  3. 3. Calculate accrual accounting rate of return based on net initial investment.
  4. 4. Calculate accrual accounting rate of return based on average investment.
  5. 5. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods?
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