A E2120 similar to Question Help Boston Cola is considering

(A) E21-20 (similar to Question Help * Boston Cola is considering the purchase of a special-purpose botting machine for $70,000. it is expected to have a useful ite of 4 years with no terminal dsposal value. The plant manager estimates the following savings in cash operating costs EE(Clck the icon to view the savings in cash operating costs.) Boston Cola uses a reaa ed rate of return of 20%ints cap al budgeting decors ignore inc u meta es in your analys s Assuealas nos ocrat year ende ce tirmi investment amounts 1. Net present value (Use facfor 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 $(.850 2. Payback period (Round your anower to hwo decimal places) The payback peros [ ]years

Solution

Given data, Cash outflows = $70,000 Useful life = 4 years Terminal disposal value = 0 Present value factor 20% Problem 1 : Calculation of net present value : Net present value = present value of cash inflows - present value of cash outflows Year Cash inflows Present value factor @ 20% Present value of cash inflows(Cash inflows*Present value factor) 1 30000 0.833 25000 2 25000 0.694 17361 3 20000 0.579 11574 4 15000 0.482 7234 Present value of cash inflows 61169 Less : Present value of cash outflow -70000 Net present value -8831 Problem 2 : Calculation of Pay back period : Year Cash inflow Cummulative cash inflows 1 30000 30000 2 25000 55000 3 20000 75000 4 15000 90000 When cash flows are uneven we need to determine the cummulative cash inflows and then use following formula, Pay back period = last period with a negative cash inflow + (absolute cash flow at the end of negative cash flow/total cash flow during the period after the negatuve cash flow) i.e., 2+(70000-55000)/20000 2.75 Years Problem 3 : Calculation of Discounted Pay back period : Year Cash inflow Present value factor @ 20% Present value of cash flows cummulative cash inflows 1 30000 0.833 25000 25000 2 25000 0.694 17361 42361 3 20000 0.579 11574 53935 4 15000 0.482 7234 61169 As the net present value of cash flows is negative, there will be no discounted pay back period because the initial outflow amount will never be repaid. No discounted pay back period Problem 4 : Calculation of Internal rate of return: Internal rate of return is the rate at which discounted cash inflows will be equal to the discounted cash outflows. Computation of internal rate of return PV CF PV of cf Discounting rate 10% 20% 10% 0.909 30000 27273 Pv of cash inflows 73205 61169 0.826 25000 20661 Cash outflows 70000 70000 0.751 20000 15026 Total NpV 3205 -8831 0.683 15000 10245 . Internal rate of return = L1 + (NPV@L1 / NPV@L1-NPV@L2)*(L2-L1) 73205 L1 - LOWERRATE OF INTEREST = 10% L2 - ANOTHER RATE OF INTEREST = 20% 10%+3205/(3205+8831)*10% 0.026628448 12.66% Problem:5 Computation of accrual accounting rate of return Depreciation : 70000/4 17500 Annual cash flows Depreciation expense Net annual income 30000 17500 12500 25000 17500 7500 20000 17500 2500 15000 17500 -2500 20000 Avng annual income 5000 Avg investment 35000 Accrual accounting rate of return 14.29%