The Zone Company Is Considering the Purchase of a New

question 149

Essay

The Zone Company is considering the purchase of a new machine at a cost of $1,040,000. The machine is expected to improve productivity and thereby increase cash inflows by $250,000 per year for 7 years. It will have no salvage value. The company requires a minimum rate of return of 12 percent on this type of capital investment. (Ignore income taxes for this problem.)

Required:
1. Determine the net present value (NPV) of the proposed investment. (The PV annuity factor for 12%, 7 years is 4.564.) Round your answer to the nearest whole number.
2. Determine the project's estimated internal rate of return (IRR), rounded to the nearest tenth of a percent. (Note: PV annuity factors for 7 years: @ 10% = 4.868; @ 11% = 4.712; @ 12% = 4.564; @ 13% = 4.423; @ 14% = 4.288; @ 15% = 4.160; and, @ 20% = 3.605.)
3. What is the estimated payback period for the proposed investment, under the assumption that cash inflows occur evenly throughout the year? Round your answer to 2 decimal places.
4. What is the present value payback period for the proposed investment (rounded to two decimal places)?
5. What is the estimated accounting rate of return (ARR) (on initial investment) for the proposed project? Round your answer to 1 decimal place, e.g., 0.1224 = 12.2%.