Problem - The ACME Company is evaluating a capital expenditure proposal that requires an initial investment of $1,040,000. The machine will improve productivity and thereby increases net after-tax cash inflows by $250,000 per year for 7 years. It will have no salvage value. The company requires a minimum rate of return of 12 percent on this type of capital investment.
Determine the net present value (NPV) of the investment proposal. (The PV annuity factor for 12%, 7 years is 4.564.)
Determine the proposal's internal rate of return, rounded to the nearest tenth of a percent. (Note: PV annuity factors for 7 years: @ 10% = 4.868; @ 11% = 4.712; @ 12% = 4.564; @ 13% = 4.423; @ 14% = 4.288; @ 15% = 4.160; and, @ 20% = 3.605.)
What is the estimated payback period for the proposed investment, under the assumption that cash inflows occur evenly throughout the year?
What is the present value payback period for the proposed investment?
What is the estimated accounting rate of return (on initial investment) for the proposed project?