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E21-25 (similar to) Question Help Burlington Cola is considering the purchase of

ID: 2578708 • Letter: E

Question

E21-25 (similar to) Question Help Burlington Cola is considering the purchase of a special-purpose bottling machine for $80,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates the following savings in cash operating costs (Click the icon to view the savings in cash operating costs.) Burlington Cola uses a required rate of return o 14% n its capital budgeting decisions. gnore income taxes in your anaysis. Assume all cash flows occur at year-end except or initia nvestment amounts (Click the icon to view the Future Value of $1 factors.) (Click the icon to view the Future Value of Annuity of $1 factors.) (Click the icon to view the Present Value of $1 factors.) Read the requirements 1. Net present value. (Use factor amounts rounded to three decimal places. Round your answers to the nearest whole dollar. Use a minus sign or parentheses for a negative net present value.) The net present value is $ (Click the icon to view the Present Value of Annuity of $1 factors.) - X Data Table Requirements Calculate the following for the special purpose bottling machine 1. Net present value 2. Payback period 3. Discounted payback period 4. Internal rate of return (using the interpolation method) 5. Accrual accounting rate of return based on net initial investment (Assume Year Amount $ 35,000 30,000 20,000 12,000 $ 97,000 straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return Total Print Done Print Done

Explanation / Answer

Cost of bottling machine $80,000, Life = 4 years, Dep per annum = $80,000/4 = $20,000 pa

Required:

1. NPV

YEAR

CASH OUTFLOW $

CASH SAVINGS $

DCF @ 14%

PV $

0

(80,000)

1.000

(80,000)

1

35,000

.877

30695

2

30,000

.769

23070

3

20,000

.675

13500

4

12,000

.592

7104

NET PRESENT VALUE

(5631)

IS NEGATIVE, THUS “DO NOT ACCEPT”

YEAR

CASH FLOWS

$

ACCUMULATED

@ YEAR END

PAYBACK PERIOD:

0

(80,000)

(80,000)

1

+35000

(45,000)

2

+30000

(15,000)

3

+20000

+5000

3 YEARS AND 3 MONTHS

4

+12000

+17000

YEAR

CASH FLOWS

$

ACCUMULATED

@ YEAR END

DCF @ 14%

PV

$

PAYBACK PERIOD:

0

(80,000)

(80,000)

1.000

(80000)

1

+35000

(45,000)

.877

(39465)

2

+30000

(15,000)

.769

(11535)

3

+20000

+5000

.675

+3375

3 YEARS 8MTHS

4

+12000

+17000

.592

+10064

YEAR

CASH OUTFLOW $

CASH SAVINGS $

LESS:

DEPRECIATION

0

(80,000)

1

35,000

20000

15000

2

30,000

20000

10000

3

20,000

20000

0

4

NET INVESTMENT = 80000=40000

12,000

20000

(8000)

AVERAGE PROFIT FOR 4 YEARS

$6750

  ACCRUAL ACCOUNTING RATE OF RETURN= 6750/80000 X 100 = 8.4375% pa

YEAR

CASH OUTFLOW $

CASH SAVINGS $

DCF @ 14%

PV $

0

(80,000)

1.000

(80,000)

1

35,000

.877

30695

2

30,000

.769

23070

3

20,000

.675

13500

4

12,000

.592

7104

NET PRESENT VALUE

(5631)

IS NEGATIVE, THUS “DO NOT ACCEPT”