Gravina Company is planning to spend $7,500 for a machine that it will depreciat
ID: 2562477 • Letter: G
Question
Gravina Company is planning to spend $7,500 for a machine that it will depreciate on a straight-line basis over 10 years with no salvage value. The machine will generate additional cash revenues of $1,500 a year. Gravina will incur no additional costs except for depreciation. Its income tax rate is 30%. (For parts 3 and 4 of this question use Table 1 and/or Table 2.)
What is the payback period of the proposed investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
What is the accounting (book) rate of return (ARR) based on the initial investment outlay? (Round your answer to 1 decimal place.)
Book rate of return = ? %
What is the maximum amount that Gravina Company should invest if it desires to earn an internal rate of return (IRR) of 14%? (Round your final answer to the nearest whole dollar amount.)
What is the minimum annual (pretax) cash revenue required for the project to earn a 14% internal rate of return? (Round your intermediate calculations and final answer to the nearest whole dollar amount.)
Required:Explanation / Answer
1.Pay back period=Initial Investment/Annual After-tax cash flows ie. 7500/(1500*(1-30%)) 7.14 Years 2.Average annual accounting return(AR)= 1500- annual depn. AR=1500-(7500/10)= 750 ARR on initial outlay=750/7500= 10% Maximum amount that Gravina Company should invest if it desires to earn an internal rate of return (IRR) of 14% At IRR NPV of cash inflows& outflows is = 0 0=-x+((1500*(1-30%)*5.21612) x= 5476.93 Maximum amount = 5476.93 PVOA F 14%,10 yrs.=5.21612 4. Minimum annual (pretax) cash revenue required for the project to earn a 14% internal rate of return 0=-x+(1500*5.21612) 7824.18 Minimum amount= 7824.18
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