Jeff's Auto Repair is looking at making an investment of $732,000 in new machinery. They expect to generate the following Earnings Before Amortization and Taxes as well as the following positive, after-tax cash flows: Cash flows Year Earnings before amortization & taxes (after tax) $ 197,000 $174,500 2 232,000 199,000 3 276,000 229,800 4 209,000 182,900 5 247,000 209,500 6 229,000 196,900 (a) Required: Compute the Average Accounting Return assuming the asset will be fully depreciated over the six-year time period, using straight-line depreciation, and Jeff's Auto Repair has a 30 percent tax rate. (Round your answer to two decimal places (e.g. 12.34%)) (b) Compute the payback period in years, and the internal rate of return for the project (c) Compute net present value of the project if WACC is 11 percent. (d) Should the project be undertaken, and why?

Jeff's Auto Repair is looking at making an investment of $732,000 in new machinery. They expect to generate the following Earnings Before Amortization and Taxes as well as the following positive, after-tax cash flows: Cash flows Year Earnings before amortization & taxes (after tax) $ 197,000 $174,500 2 232,000 199,000 3 276,000 229,800 4 209,000 182,900 5 247,000 209,500 6 229,000 196,900 (a) Required: Compute the Average Accounting Return assuming the asset will be fully depreciated over the six-year time period, using straight-line depreciation, and Jeff's Auto Repair has a 30 percent tax rate. (Round your answer to two decimal places (e.g. 12.34%)) (b) Compute the payback period in years, and the internal rate of return for the project (c) Compute net present value of the project if WACC is 11 percent. (d) Should the project be undertaken, and why?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Calculate accrual accounting rate of return based on net initial investment.
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. The Indiana Company has had a great year financially and they are wanting to better understand the amount of free cash flows that they have to invest back into the company. After having sales of $1 million, total costs of $500,000, interest expense of $50,000, depreciation of $100,000, and Capex of $90,000, what is the amount of free cash flow for the company? Assume a 35% tax rate and only use the information that is provided above. a. $220,000 b. $270,000 c. $237,500 d. $335,000 SOOK 50-100

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