2D2C JONES & COMPANY IS CONSIDERING THE ACQUISITION OF SCANNING E...

341.

CSO: 2D2c

LOS: 2D2c

Jones & Company is considering the acquisition of scanning equipment to mechanize its

procurement process. The equipment will require extensive testing and debugging as

well as user training prior to its operational use. Projected after-tax cash flows are as

follows.

Time Period

After-Tax Cash

Year

Inflow/(Outflow)

0

$(600,000)

1

(500,000)

2

450,000

3

450,000

4

350,000

5

250,000

Management anticipates the equipment will be sold at the beginning of Year 6 for

$50,000 and its book value will be zero. Jones’ internal hurdle and effective income tax

rates are 14% and 40%, respectively. Based on this information, a negative net present

value was computed for the project. Accordingly, it can be concluded that

a.

the project has an internal rate of return (IRR) less than 14% since IRR is the

interest rate at which net present value is equal to zero.

b.

Jones should examine the determinants of its hurdle rate further before analyzing

any other potential projects.

c.

Jones should calculate the project payback to determine if it is consistent with the

net present value calculation.

d.

the project has an IRR greater than 14% since IRR is the interest rate at which net

present value is equal to zero.