The consulting company Miller Davis & Brown (M D B) is in that never-ending budgeting phase of the year. Realizing that they couldn’t defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales—at least that’s what the managers are expecting. Information related to this investment is as follows. Cost of new computers $25,400 Salvage value of new computers at end of useful life $2,400 Life of new computers (years) 5 Market value of old computers today (equal to book value) $1,900 Annual software update cost (necessary for all computers, old or new) $2,800 Annual operating cash inflows from efficiency gains and increased sales due to new computers $9,200 Minimum required rate of return 6% Applicable tax rate 23% Determine if this investment makes sound financial sense for this company by completing the following. Calculate the NPV of this investment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NPV $enter the net present value in dollars rouded to 2 decimal places Based on this NPV amount, is the IRR higher or lower than 6%? The IRR select an option than 6% Calculate the IRR for this investment. (Round answer to 2 decimal places, e.g. 15.25%.) IRR enter the internal rate of return in percentages rounded to 2 decimal places % Determine the simple payback period using (1) before-tax cash flows and (2) after-tax cash flows. (Round answers to 2 decimal places, e.g. 15.25.) Before-Tax Cash Flows After-Tax Cash Flows Simple payback period enter the simple payback period rounded to 2 decimal places enter the simple payback period rounded to 2 decimal places Determine the discounted payback period using after-tax cash flows. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36.) Discounted payback period enter the discounted payback period rounded to 2 decimal places Find the ARR. (Round answer to 1 decimal place, e.g. 15.2%.) ARR enter the accounting rate of return in percentages rounded to 1 decimal place %

The consulting company Miller Davis & Brown (M D B) is in that never-ending budgeting phase of the year. Realizing that they couldn’t defer a technology update any longer, the managers plan to replace all of the computers in the office. The old computers will be sold for market value. When the new computers reach the end of their useful lives, they will be sold as well. The cost of the combined new computers and annual software updates should be more than covered by efficiency gains and increased volume of sales—at least that’s what the managers are expecting. Information related to this investment is as follows. Cost of new computers $25,400 Salvage value of new computers at end of useful life $2,400 Life of new computers (years) 5 Market value of old computers today (equal to book value) $1,900 Annual software update cost (necessary for all computers, old or new) $2,800 Annual operating cash inflows from efficiency gains and increased sales due to new computers $9,200 Minimum required rate of return 6% Applicable tax rate 23% Determine if this investment makes sound financial sense for this company by completing the following. Calculate the NPV of this investment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NPV $enter the net present value in dollars rouded to 2 decimal places Based on this NPV amount, is the IRR higher or lower than 6%? The IRR select an option than 6% Calculate the IRR for this investment. (Round answer to 2 decimal places, e.g. 15.25%.) IRR enter the internal rate of return in percentages rounded to 2 decimal places % Determine the simple payback period using (1) before-tax cash flows and (2) after-tax cash flows. (Round answers to 2 decimal places, e.g. 15.25.) Before-Tax Cash Flows After-Tax Cash Flows Simple payback period enter the simple payback period rounded to 2 decimal places enter the simple payback period rounded to 2 decimal places Determine the discounted payback period using after-tax cash flows. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36.) Discounted payback period enter the discounted payback period rounded to 2 decimal places Find the ARR. (Round answer to 1 decimal place, e.g. 15.2%.) ARR enter the accounting rate of return in percentages rounded to 1 decimal place %

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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Related questions

Question

Cost of new computers		$25,400
Salvage value of new computers at end of useful life		$2,400
Life of new computers (years)		5
Market value of old computers today (equal to book value)		$1,900
Annual software update cost (necessary for all computers, old or new)		$2,800
Annual operating cash inflows from efficiency gains and increased sales due to new computers		$9,200
Minimum required rate of return		6%
Applicable tax rate		23%

Determine if this investment makes sound financial sense for this company by completing the following.

Calculate the NPV of this investment. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

NPV

$enter the net present value in dollars rouded to 2 decimal places

Based on this NPV amount, is the IRR higher or lower than 6%?

The IRR select an option than 6%

Calculate the IRR for this investment. (Round answer to 2 decimal places, e.g. 15.25%.)

IRR

enter the internal rate of return in percentages rounded to 2 decimal places %

Determine the simple payback period using (1) before-tax cash flows and (2) after-tax cash flows. (Round answers to 2 decimal places, e.g. 15.25.)

		Before-Tax Cash Flows		After-Tax Cash Flows
Simple payback period		enter the simple payback period rounded to 2 decimal places		enter the simple payback period rounded to 2 decimal places

Determine the discounted payback period using after-tax cash flows. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 2 decimal places e.g. 5,125.36.)

Discounted payback period

enter the discounted payback period rounded to 2 decimal places