Jenny Durdil Company is considering an investment of $200,000 in new equipment w
ID: 2494093 • Letter: J
Question
Jenny Durdil Company is considering an investment of $200,000 in new equipment which will be depreciated on a straight-line basis (8-year life, no salvage value). The expected annual revenues and costs of the new product that will be produced from the equipment are:
Sales
$292,000
Less costs and expenses:
Manufacturing costs
S200,000
Equipment depreciation
25,000
Selling and administrative
43,900
268,900
Income before income taxes
23,100
Income tax expense (30%)
6,930
Net income
$ 16,170
Instructions
(a) Compute the annual rate of return.
(b) Compute the cash payback period.
(c) Compute the net present value assuming a 12% required rate of return.
(d) Determine the internal rate of return.
Explanation / Answer
Answer (a) : Annual Rate of Return
Annual Rate of Return = Annual Income after dep & Tax/Initial investment
= 16170/200000
= 8.085%
Answer (b) Pay back Period
Payback period = Initial Investment/Annual cashinflow
= 200000/(16170+25000)
= 200000/41170
= 4.85 years
Answer (c) : Net Present Value
NPV = Total Cash Inflow annualy* PVIFA Factor - Initial Investment
= ( 41170 *4.968*) -200000
= 204532.56-200000
= $ 4532.56
* PVIFA factor @ 12% for 8 years is 4.968
Answer (d) : Internal rate of return
IRR is that percentage of return where NPV of a project iszero or apprx zero.
NPV @ 12 % = Total Cash Inflow annualy* PVIFA Factor - Initial Investment
= ( 41170 *4.968) -200000
= 204532.56-200000
= $ 4532.56
NPV @ 13 % = Total Cash Inflow annualy* PVIFA Factor - Initial Investment
= ( 41170 *4.799) -200000
= 197574.83-200000
= $ -2425.17
Hence We can say IRR is approximately 12.5 %.
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