Required: 1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. (10) 2. Calculate accrual accounting rate of return based on net initial investment. (15)
Required: 1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. (10) 2. Calculate accrual accounting rate of return based on net initial investment. (15)
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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Ella's Bakery plans to purchase a new oven for its store . The oven has an estimated useful life of 4 years . The estimated pretax cash flows for the oven are as shown in the table that follows , with no anticipated change in working capital . Ella's Bakery has a 14 % after - tax required
Transcribed Image Text:New equipment purchase, income taxes. Ella's Bakery plans to purchase a new oven for
store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for t
oven are as shown in the table that follows, with no anticipated change in working capital. Ell
Bakery has a 14% after-tax required rate of return and a 35% income tax rate. Assus
depreciation is calculated on a straight-line basis for tax purposes using the initial investme
in the oven and its estimated terminal disposal value. Assume all cash flows occur at year-e
except for initial investment amounts.
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B
C
E
F
1
Relevant Cash Flows at End of Each Year
1
2
3
4
3 Initial oven investment
Annual cash flow from operations
4 (excluding the depreciation effect)
5 Cash flow from terminal disposal of oven
($186,000)
$77,000
$77,000
$77,000
$ 6,000
$77,000
Required:
1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. (10)
2. Calculate accrual accounting rate of return based on net initial investment. (15)
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