Question

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return

Follow the format shown in Exhibit 12B.1 and Exhibit 12B.2 as you complete the requirements below.

Blaylock Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $384,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow:

Year		Cash Revenues		Cash Expenses
1		$510,000		$360,000
2		510,000		360,000
3		510,000		360,000
4		510,000		360,000
5		510,000		360,000

Required:

1. Compute the payback period for the NC equipment. Round your answer to two decimal places.
years

2. Compute the NC equipment's ARR. Round the percentage to one decimal place. Assume straight-line depreciation.
%

3. Compute the investment's NPV, assuming a required rate of return of 10%. Round present value calculations and your final answer to the nearest dollar.
$

4. Compute the investment's IRR.

Answer 1

1	Payback period= Originalinvesment/Annual cashinflow
	= 384,000/(510000-360000)
	2.56	Years
2	Initial investment (Average depreciation =384,000/5 = 76800):
	(510000-360000) = 150000
	(150000-76800)/384000
	19.1%
3
Year	Cash Flow	Discount Factor	Present Value
0	-384000	1	-384000
1	150000	0.909	136350
2	150000	0.826	123900
3	150000	0.751	112650
4	150000	0.683	102450
5	150000	0.621	93150
NPV			184500
4	Investment/Annualcash flow
	384000/150000
	2.56