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Capital Budgeting Decisions with uneven cash flows

Capital budgeting with uneven cash flows, no income taxes.

Southern Cola is considering the purchase of a special-purpose bottling ma chine for $23,000, It is expected to have a useful life of four years with a $0 terminal disposal value. The plant manager estimates the following savings in cash operating costs:

____Year_____Amount

_____1______$10,000
_____2________8,000
_____3________6,000
_____4________5,000

Total_______$29,000

Southern Cola uses a required rate of return of 16% in its capital budgeting decisions. Ignore income taxes in your analysis,

Compute the following:

1. Net present value
2. Payback period
3. Internal rate of return
4. Accrual accounting rate of return based on net initial investment (Assume straight-line depreciation.
Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)

Solution Summary

The solution calculates Net present value, Payback period, Internal rate of return, Accrual accounting rate of return based on net initial investment.

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