Kravitz Company Is Planning to Acquire a $250,000 Machine to Improve

question 120

Essay

Kravitz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies, thereby reducing annual cash operating costs (before taxes) by an estimated $80,000 for each of the next five years. The company's estimated weighted-average cost of capital (WACC) is 8%. The machine will be depreciated using straight-line method over a five-year period with no salvage value. Fritz is subject to a combined 40% income tax rate, t.
Note: at 8%, the PV annuity factor for five years is 3.993; at 8%, PV $1 factors are as follows: for year 1 = 0.926; for year 2 = 0.857; for year 3 = 0.794; for year 4 = 0.735; and, for year 5 = 0.681.
Required:
1. What is the estimated net present value (NPV) of the proposed investment, rounded to the nearest whole number?
2. What is the present value payback period, in years (rounded to one decimal place, that is, to tenth of a year, e.g., 4.085 years = 4.1 years)?
3. What is the estimated internal rate of return (IRR) on the proposed investment? Round your answer to one decimal place (i.e., tenth of a percent, e.g., 13.4%). (Note: to answer this question, you will need access to the tables presented in Chapter 12, Appendix C or to Excel.)

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