Concept explainers
a.
To prepare: The annual depreciation schedule.
Introduction:
MACRS depreciation method:
MACRS stands for modified accelerated cost recovery system, which is a tool of depreciation used in the U.S. for tax purposes. This system places all the assets into categories with pre-specified depreciation periods.
Depreciation schedule:
A table that shows the amount of depreciation of a particular asset over the years of its usage is termed as depreciation schedule.
b.
To calculate: The annual cash flow including the working capital recovered in 6th year.
Introduction:
Cash flow:
The amount of cash and its equivalents that are transferred into and out of a business is termed as cash flows.
Working capital:
A measurement that helps a company to find its liquidity is termed as working capital. It is the difference between the current assets and current liabilities of a company.
c.
To calculate: The weighted average cost of the capital.
Introduction:
Weighted average cost of capital (WACC):
It is defined as the rate at which a company needs to pay on average to all its shareholders in
d.
To calculate: The NPV of the investment and whether the purchase of the new equipment by the Data-Point Engineering should be made or not.
Introduction:
It is the difference between the PV (present value) of
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- Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.arrow_forwardManzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?arrow_forwardCaduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.arrow_forward
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