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Kravitz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies, thereby reducing annual cash operating costs (before taxes) by $80,000 for each of the next five years. The company has a minimum rate of return of 8% on all capital investments. The machine will be depreciated using straight-line method over a five-year life with no salvage value at the end of five years. Fritz is subject to a combined 40% income tax rate.
Note: at 8%, the PV annuity factor for five years is 3.993; at 8%, the PV $1 factor for year 1 = 0.926, the PV $1 factor for year 2 = 0.857, the PV $1 factor for year 3 = 0.794, the PV $1 factor for year 4 = 0.735, and the PV $1 factor for year 5 = 0.681.

Required:

1. What is the net present value of the proposed investment?
2. What is the present value payback period, in years (rounded to one decimal place, that is, to tenth of a year, e.g., 4.1 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%).

Accounting Basics, Accounting

  • Category:- Accounting Basics
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