11) Is the IRR method always accurate?
12) Why do managers use the net present value (NPV) method?
13) In-a-Jiff Tire Service owner, Jeffery Haberton, has the opportunity to invest $360,000 at 8% interest during a one-year period. After the first year, the value of the investment is expected to be $28,800. According to the time value of money, how much would the same $360,000 be worth in one year if it is not invested at 8%?
14) The managerial accountant at Insider Technology Organization, a medical imaging company, considers the purchase of a new machine to increase the efficiency in the image division. The existing machine is operable for 4 more years and it will have a disposal price of $0. If the current machine is sold now it will be worth $75,000. The cost of the new machine is $250,000 and an additional cash investment of working capital of $25,000 is needed.
The manager expects the new machine to reduce the time needed to take each image, and it will improve the green energy environmental initiatives because it is more efficient. The new machine is expected to net $50,000 in additional cash inflows during the year of acquisition and $75,000 each additional year of use.
The new machine has a five-year life and $0 disposal value. The cash flows will be recognized at the end of each year. The income taxes are not considered, and the investment in working capital is not expected to be recovered at the end of the machine's useful years.
Compute the net present value of the investment, assuming the required rate of return is 12%. Would the manager at the company want to purchase the new machine?
A) ($21,116); No.
B) ($42,184); No.
C) $42,184; Yes.
D) $48,362; Yes.
E) $96,742; Yes.