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4 The Jason Company is considering the purchase of a machine that will increase revenues by $25,000 each year. Cash outflows for operating this...
Q. 4 The Jason Company is considering the purchase of a machine that will increase revenues by $25,000 each year. Cash outflows for operating this machine will be $11,000 each year. The cost of the machine is $65,000. It is expected to have a useful life of five years with $5,000 salvage value at the end of its useful life. Jason Co has a required rate of return of 8% (Ignore income taxes in this problem. You may use a math calculator, or the tables at the end of the test.)
Required:
1. Over the five-year period the machine will generate a total of $70,000 in net cash; why is this information not enough by itself for management to decide whether to accept or reject the project?
2. Determine the net present value. Does this support your answer in Requirement #1
3. Determine the IRR [Rate may be expressed as a range]
4. Discuss the very different answers from Requirements 1 to 3. Explain why the simple rate of return is not acceptable, and net present value is a good method for assessing projects of this type
[15 marks][16 min]
Cost:
Salvage:
Operating cash flows:
Time:
Interest rate:
Cost: Time Amount Pvif Present Value
Of Cash Flows of Cash Flows
Operating
Net Flows Pvifa
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Net Present Value
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