Chapter 26, Problem P26.39CT

Using Excel for capital budgeting calculations

Download an Excel template for this problem online in MyAccountingLab or athttp://www.pearsonhighered.com/Horngren

Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years are:

Year	Net Cash Outflows	Net Cash Inflows
0	$(100,000)
1		25,000
2		29,000
3		26,000
4		28,000
5		35,000

Requirements

1. Compute the accounting rate of return.

2. Compute the net present value of the investment using Excel's PV function.

3. Compute the net present value of the investment using Excel's NPV function.

4. Compute the profitability index, rounded to two decimal places.

5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round.