Grove Corp. is considering the purchase of a new piece of equipment. The cost sa

Question

Grove Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $200,800. The equipment will have an initial cost of $1,200,800 and have an 8 year life. The salvage value of the equipment is estimated to be $200,800. The hurdle rate is 10%. Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.)

a. What is the accounting rate of return? (Round your answer to 2 decimal places.)
b. What is the payback period? (Round your answer to one decimal place.)

c. What is the net present value? (Do not round intermediate calculations and round your final answer to the nearest dollar amount.)

d. What would the net present value be with a 15% hurdle rate? (Do not round intermediate calculations and round your final answer to the nearest dollar amount.)

e. Based on the NPV calculations, in what range would the equipment’s internal rate of return fall? (Round your answer to 2 decimal places.)

Explanation / Answer

a. Accounting rate of return = Annual Net Income / Investment = $200800/$1200800 = 16.72%

b. Payback period = Initial investment / Annual net cash flow = $1200800/$325800 = 3.69 years

*Annual Depreciation = ($1200800 - $200800) / 8 years = $125000

c. Net Present Value (with 10% hurdle rate)

d. Net Present Value (with 15% hurdle rate)

Per Chegg guidelines, 4 sub-parts have been answered.

Annual Net Cash Flows: Net Income $ 200800 Add: Non-cash expense Depreciation* $ 125000 Annual Net Cash Flows $ 325800

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