elk grovian bookstore desire to buy a new coding machine to help control book in
ID: 2452994 • Letter: E
Question
elk grovian bookstore desire to buy a new coding machine to help control book inventories. The machine sells for $36,586 an requires working capital of $4000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash saving from the purchase of the machine will be $10,000. Ignore income taxes. Required: a. Compute the net present value at a 14 percent required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment.
Explanation / Answer
Answer:-
b.Trial and error is required. Because net present value is negative in part a, theinternal rate of return is less than 14%. Start by trying 12%
Answer
With a zero net present value, the internal rate of return is 12%
c.Payback period = ($36,586 + $4,000)/$10,000 = 4.06 years
Predicted cash flow Years Pv factor PV of Cash flow Investment $ (36,586) 0 1 (36,586) Working capital needed (4,000) 0 1 (4,000) Annual operations 10,000 1-5 3.433 34,330 Working capital returned 4,000 5 0.519 2,076 Salvage Value 4,000 5 0.519 2,076 Net present value (2,104)Related Questions
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