Paulsen Inc

question 95

Essay

Paulsen Inc. is considering the purchase of a $700,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Paulsen is expected to be able to sell all that it can manufacture for the next five years. The government exempted taxes on profits from new investments to encourage capital investments. This legislation is not expected to be altered in the foreseeable future. The equipment is expected to have five years of useful life with no salvage value. The company employs straight-line depreciation. The net cash inflows are expected to be $180,000 each year for five years. Olsen uses a rate of 9% in evaluating its capital investment projects.
Required:
Round all answers to 2 decimal places (e.g., 0.12338 = 12.34%; 0.12333 = 12.33%).
1. Calculate the estimated payback period for this proposed investment. (Assume that cash inflows occur evenly throughout the year.)
2. Calculate the project's accounting rate of return (ARR) based on the initial investment.
3. Calculate the accounting rate of return (ARR) based on average investment, where the latter is defined as a simple average of beginning-of-project net book value and end-of-project net book value.
4. Calculate the internal rate of return (IRR) of this proposed investment. (Note: To answer this question, students need access either to Appendix C, Table 2 or to Excel.)

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Definitions:

Dividend

Money given to shareholders by a corporation, usually sourced from the firm's profits.

Dividend Yield

A measurement in finance that compares the dividends a company pays each year with its stock price.

Dividend

A portion of a company's earnings that is distributed to shareholders, usually on a quarterly or annual basis.

Variance

A statistical measure that represents the dispersion or spread of a set of data points or investment returns around their mean or average value.