2.99 See Answer

Question: Homer Inc. plans to purchase a new


Homer Inc. plans to purchase a new rendering machine for its animation facility. The machine costs $102,500 and is expected to have a useful life of eight years, with a terminal disposal value of $22,500. Savings in cash operating costs are expected to be $22,250 per year. However, additional working capital is needed to maintain the operations of the rendering machine. 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 12%. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Century Lab uses straight-line depreciation for its machines.

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


2.99

See Answer