Question

Jefferson Labs​, a taxpaying​ entity, estimates that it can save $29,000 a year in cash operating costs for the next

8 years if it buys a​ special-purpose eye-testing machine at a cost of $115,000. No terminal disposal value is expected. 'Jefferson Labs' required rate of return is 12​%.

Assume all cash flows occur at​ year-end except for initial investment amounts. Jefferson Labs uses​ straight-line depreciation. The income tax rate is 38%

for all transactions that affect income taxes.

Requirement 1. Calculate the following for the​ special-purpose eye-testing​ machine:

a. Net present value​ (NPR) ​(Round interim calculations and your final answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present​ value.)

The net present value is $

.

b. Payback period ​(Round your answer to two decimal​ places.)

The payback period is

years.

c. Internal rate of return ​(Round the rate to two decimal​ places, X.XX%.)

The internal rate of return (IRR) is

%.

d. Accrual accounting rate of return based on net initial investment ​(Round interim calculations to the nearest whole dollar. Round the rate to two decimal​ places, X.XX%.)

The accrual accounting rate of return (AARR) is

% based on net initial investment.

e. Accrual accounting rate of return based on average investment ​(Round interim calculations to the nearest whole dollar. Round the rate to two decimal​ places, X.XX%.)

The accrual accounting rate of return (AARR) is

% based on average investment.

Requirement 2. How would your computations in requirement 1 be affected if the​ special-purpose machine had a

$12,000

terminal disposal value at the end of

8

​years? Assume depreciation deductions are based on the

$115,000

purchase cost and zero terminal disposal value using the​ straight-line method. Answer briefly in words without further calculations.

NPV would

because the disposal value

Payback would

because the disposal value

IRR would

because the disposal value

AARR would		because the disposal value
under either method.

Answer 1