Answered: Required: 1. Calculate (a) net present…

Required: 1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. (10) 2. Calculate accrual accounting rate of return based on net initial investment. (15)

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 18E

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Ella's Bakery plans to purchase a new oven for its store . The oven has an estimated useful life of 4 years . The estimated pretax cash flows for the oven are as shown in the table that follows , with no anticipated change in working capital . Ella's Bakery has a 14 % after - tax required rate of return and a 35 % income tax rate . Assume depreciation is calculated on a straight - line basis for tax purposes using the initial investment in the oven and its estimated terminal disposal value . Assume all cash flows occur at year - end except for initial investment amounts .

New equipment purchase, income taxes. Ella's Bakery plans to purchase a new oven for
store. The oven has an estimated useful life of 4 years. The estimated pretax cash flows for t
oven are as shown in the table that follows, with no anticipated change in working capital. Ell
Bakery has a 14% after-tax required rate of return and a 35% income tax rate. Assus
depreciation is calculated on a straight-line basis for tax purposes using the initial investme
in the oven and its estimated terminal disposal value. Assume all cash flows occur at year-e
except for initial investment amounts.
Home
Insert
Page Layout
Formulas
Data
Review
View
B
C
E
F
1
Relevant Cash Flows at End of Each Year
1
2
3
4
3 Initial oven investment
Annual cash flow from operations
4 (excluding the depreciation effect)
5 Cash flow from terminal disposal of oven
($186,000)
$77,000
$77,000
$77,000
$ 6,000
$77,000
Required:
1. Calculate (a) net present value, (b) payback period, and (c) internal rate of return. (10)
2. Calculate accrual accounting rate of return based on net initial investment. (15)

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