Name : Dinda Putri Novanti
Student ID :1910533004
Financial Management I Assignment

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
Answer :
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

Basic Evaluation Methods. The following data are given for the Alright Aluminum Company:
Initial cost of proposed equipment $75,000
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).
Answer :

Payback period = Initial Investment = $75,000 = 4.167 years
Annual Savings $18,000

PV = A X PVIFA _{12%, 7 years} = $18,000 x 4.5638 = $82,148 (rounded)

PV = $3,000 X PVIF _{12%, 7 years }= $3,000 x 0.4523 = $1,357 (rounded)

Total PV = $82,148 + $1,357 = $83,505

NPV = PV – I = $83,505  $75,000 = $8,505

At IRR, I = PV.
$75,000 = $18,000 x PVIFA_{r,7}
75,000 = PVIFA_{r,7}
18,000
4,1667 = PVIFA_{r,7}
PVIFA
14% 4,2883 4,2883
IRR 4,1667
15% 4,1604
0,1216 0,1279
IRR = 14% + (4.2883 – 4.1667) ( 15%  14%)
4.2883 – 4.1604
= 14% + 0.1216 (1%)
0.1279
= 14% + 0.95%
= 14.95%

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. Straightline 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).
Answer :

Payback period = Initial Investment
Annual Cash Flow
Payback period = $20,000 = 5year
$4,000/years

Accounting Rate of Return (ARR)
Accounting Rate of Returm (ARR) = Net Income
Initial Investment
Depreciation = $20,000 = $2,000/year
10years
Accounting Rate of Return (ARR) = ($4,000  $2,000)/year = 0,10 = 10
$20,000

Net Percent Value (NPV), assuming a cost of capital (before tax) of 12%
Net Percent Value (NPV) = PV of cashflow – initial investment
Net Percent Value (NPV) = $4,000 *(PVIFA 12)  $20,000 = $4,000 * 5.65  $20,000 = $2,600

Internal Rate of Return (IRR)
$4,000 *PV Factor = $20,000 – PV Factor = $20,000 = PV Factor 5
$4,000
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