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.