Reference no: EM132796635

Bob Jensen Inc. purchased a $650,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital investments, the government has exempted taxes on profits from new investments. This legislation is to be in effect for the foreseeable future. The machine is expected to have a 10-year useful life with no salvage value. Jensen uses straight-line depreciation.

Jensen uses a 10% discount rate in evaluating capital investments, the investment is subject to taxes, and the projected pretax operating cash inflows are as follows:

Year        Pretax Cash Inflow

1                       $65,000
2                       80,000
3                           120,000
4                           200,000
5                            240,000
6                            300,000
7                             270,000
8                            240,000
9                            120,000
10                              80,000

Jensen has been paying 25% for combined federal, state, and local income taxes, a rate that is not expected to change during the period of this investment. The firm uses MACRS depreciation. The asset qualifies as a 5-year property.

Required:

Problem a: Compute the following for the proposed investment:

1. It's payback period (in years) under the assumption that the cash inflows occur evenly throughout the year.
2. Its accounting (book) rate of return based on (a) the initial investment, and (b) an average investment (calculated here as a simple average of the 10 average annual book values; for each year, the average book value is the sum of the beginning-of-year and end-of-year book value, divided by two; note: the average book value for each of the last four years is $0).
3. Its estimated net present value (NPV).
4. Its internal rate of return (IRR). Use the built-in IRR function in Excel.
5. Its modified internal rate of return (MIRR).