Bernie Company purchased a new machine, with an estimated useful life of five years and no salvage

Question:

Bernie Company purchased a new machine, with an estimated useful life of five years and no salvage value, for $45,000. The machine is expected to produce net cash inflows from operations, before income taxes, as follows:

1st year .........$ 9,000

2nd year ........ 12,000

3rd year ......... 15,000

4th year ......... 9,000

5th year ......... 8,000

Bernie will use the sum-of-the-years’-digits method to depreciate the new machine. Bernie uses 10 percent for evaluating capital investments and is currently in a 24 percent income tax bracket.

Required

Set up an Excel spreadsheet to determine:

1. The payback period of the proposed investment (assume that cash inflows occur evenly throughout the year).

2. The net present value (NPV) of the proposed investment.

3. The internal rate of return (IRR) of the proposed investment.

4. The discounted payback period of the proposed project.

5. The modified internal rate of return (MIRR) of the proposed investment. Explain the difference between IRR and MIRR.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...