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Question: Century Lab plans to purchase a new

Century Lab plans to purchase a new centrifuge machine for its Manitoba facility. The machine costs $137,500 and is expected to have a useful life of eight years, with a terminal disposal value of $37,500. Savings in cash operating costs are expected to be $31,250 per year. However, additional working capital is needed to keep the machine running efficiently. The working capital must continually be replaced, so an investment of $10,000 needs to be maintained at all times, but this investment is fully recoverable (will be “cashed in”) at the end of the useful life. Century Lab’s required rate of return is 14%. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts.

1. Calculate net present value.
2. Calculate internal rate of return.
3. Calculate accrual accounting rate of return based on net initial investment. Assume straight-line depreciation.
4. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods?


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