Name : Dinda Putri Novanti

1. 
   Calculation of initial investment. A firm is considering replacing an old machine with another. The new machine cost $90.000 plus $10.000 to install. For each of the four cases given in problem 8.1, calculate the initial investment of the replacement
   

Cost of new machine $90,000 $90,000 $90,000 $90,000

+ Installation cost 10,000 10,000 10,000 10,000

̶̵ Proceeds from sale of old machine 80,000 70,000 40,000 38,000

+ Taxes on sale of old machine 17,500 13,800 0 (920)

Initial Investment 37,500 43,800 60,000 61,080

2. 
   Basic Evaluation Methods. The following data are given for the Alright Aluminum Company:
   

Estimated useful life 7 years

Estimated annual savings in cash operating expenses $18,000

Predicted residual value at the end of the useful life $3,000

Cost of capital 12%

Compute the: (a) payback period; (b) present value of estimated annual savings; (c) present value of estimated residual value; (d) total present value of estimated cash inflows; (e) net present value (NPV); and (f) internal rate of return (IRR).

1. 
   Payback period = Initial Investment = $75,000 = 4.167 years
   

2. 
   PV = A X PVIFA _{12%, 7 years} = $18,000 x 4.5638 = $82,148 (rounded)
   
3. 
   PV = $3,000 X PVIF _{12%, 7 years} = $3,000 x 0.4523 = $1,357 (rounded)
   
4. 
   Total PV = $82,148 + $1,357 = $83,505
   
5. 
   NPV = PV – I = $83,505 - $75,000 = $8,505
   
6. 
   At IRR, I = PV.
   

75,000 = PVIFA_r,7

4,1667 = PVIFA_r,7

PVIFA

14% 4,2883 4,2883

0,1216 0,1279

4.2883 – 4.1604

0.1279

= 14.95%

3. 
   Basic Evaluation Methods. The Rango Company is considering a capital investment for which the initial outlay is $20,000. Net annual cash inflows (before taxes) are predicted to be $4,000 for 10 years. Straight-line depreciation is to be used, with an estimated salvage value of zero. Ignore income taxes. Compute the: (a) payback period; (b) accounting rate of return (ARR); (c) net present value (NPV), assuming a cost of capital (before tax) of 12 percent; and (d) internal rate of return (IRR).
   

1. 
   Payback period = Initial Investment
   

$4,000/years

2. 
   Accounting Rate of Return (ARR)
   

Initial Investment

Depreciation = $20,000 = $2,000/year

10years

Accounting Rate of Return (ARR) = ($4,000 - $2,000)/year = 0,10 = 10

3. 
   Net Percent Value (NPV), assuming a cost of capital (before tax) of 12%
   

Net Percent Value (NPV) = $4,000 *(PVIFA 12) - $20,000 = $4,000 * 5.65 - $20,000 = $2,600

4. 
   Internal Rate of Return (IRR)