Bookstore wants to buy a new coding machine to help control book inventories. The machine sells for $30,000 and requires working capital of $4,000. Its estimated useful life is 4 years and it has an estimated salvage value of $5,000. The working capital will also be recovered at the end of the machine’s useful life. The Company expects to save $11,000 in operating costs per year by purchasing this machine. The Company uses straight-line depreciation. Note: all computations are pretax except 4 below.

Required:

Compute the net present value and internal rate of return (using excel) of the machine at a 14% rate of return.

Compute the payback period of the investment.

Compute the pretax accrual accounting rate of return, based on the initial investment.

Compute the after tax accrual accounting rate of return. The Company’s tax rate is 40%.

Run two scenarios that vary inputs that you think the Company should consider. Compute the NPV and IRR for these scenarios. Note: You cannot change the rate of return.

Should the company buy this machine? Why or why not? What other business considerations would you want to point out to the company?

Set up your Excel spreadsheet with 4 tabs

·       Input and conclusion (Inputs and 5 above)

·       Net present value and IRR (1) above

·       Payback (2) above

·       Accrual accounting rates of return (3 and 4 above)

·       Scenarios (5 above)