Bob Jensen, Inc., purchased a $650,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. The government has exempted taxes on profits from new investments to encourage capital investments. This legislation is to be in effect in the foreseeable future. The machine is expected to have 10 years useful life with no salvage value. Jensen uses straight-line depreciation. The net cash inflow is expected to be $150,000 each year for 10 years. Jensen uses 12 percent in evaluating capital investments. Data
Purchase price of machine 650000
Expected useful life in years 10
Expected net cash inflow per year 150000
Discount rate 0.12
1. Payback period
2. Accounting (book) rate of return based on (a) initial investment, and (b) average investment
3. Net present value (NPV)
4. Present value payback period
5. Internal rate of return (IRR)
6. Modified internal rate of return (MIRR)