Payback Period NET PRESENT VALUE
261. ABC Boat Company is interested in replacing a molding machine with a new improved model.
The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40,000.
The new machine costs $160,000 and has a predicted salvage value of $24,000 at the end of six years. If purchased, the new machine will allow cash savings of $40,000 for each of the first three years, and $20,000 for each year of its remaining six-year life.
Required: (D) Horngren
What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?
262. (Ignore income taxes in this problem.) Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $125,000 to equip the business and another $60,000 for inventories and other working capital needs.
Rent for the building used by the business will be $35,000 per year. Jim’s marketing studies indicate that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses a 16% discount rate.
Required: (Moderate) N & G Would you advise Jim to make this investment?
263. (Ignore income taxes in this problem.) General Manufacturing Company consists of several divisions, one of which is the Transportation Division. The company has decided to dispose of this division since it no longer fits the company's long-term strategy. An offer of $9,000,000 has been received from a prospective buyer. If General retained the division, the company would operate the division for only nine years, after which the division would no longer be needed and would be sold for $600,000. If the company retains the division, an immediate investment of $500,000 would need to be made to update equipment to current standards. Annual net operating cash flows would be $1,805,000 if the division is retained. The company’s discount rate is 12%.
Required: (Moderate) N & G
Using the net present value method, determine whether General Manufacturing should accept or reject the offer made by the potential buyer.
264 (Ignore income taxes in this problem.) Vernon Company has been offered a 7-year contract to supply a part for the military. After careful study, the company has developed the following estimated data relating to the contract:
Cost of equipment needed ... $300,000 Working capital needed ... $ 50,000 Annual cash receipts from the delivery of parts, less cash operating costs $ 70,000 Salvage value of equipment at termination of the contract $ 5,000 It is not expected that the contract would be extended beyond the initial contract period. The company's discount rate is 10%.
Required: (Moderate) N & G
Use the net present value method to determine if the contract should be accepted. Round all computations to the nearest dollar.
265. (Ignore income taxes in this problem.) Mark Stevens is considering opening a hobby and craft store. He would need $100,000 to equip the business and another $40,000 for inventories and other working capital needs. Rent on the building used by the business will be $24,000 per year. Mark estimates that the annual cash inflow from the business will amount to $90,000. In addition to building rent, annual cash outflow for operating costs will amount to $30,000. Mark plans to operate the business for only six years. He estimates that the equipment and
furnishings could be sold at that time for 10% of their original cost. Mark uses a discount rate of 16%.
Required: (Moderate) N & G
Would you advise Mark to make this investment? Use the net present value method.
266 (Ignore income taxes in this problem.) Bradley Company's required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a very popular consumer item.
No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently half-empty and there are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only 5 years. The distributorship would generate a $17,000 net annual cash inflow.
Required: (Moderate) N & G
What is the net present value of the project at a discount rate of 14%? Should the project be accepted?
267. (Ignore income taxes in this problem.) The following data concern an investment project:
Investment in equipment $16,000
Net annual cash inflows $ 3,600
Working capital required $ 4,500
Salvage value of the equipment $ 2,000
Life of the project 12 years
Discount rate 14%
The working capital will be released for use elsewhere at the conclusion of the project.
Required: N & G
Compute the project's net present value.
268 (Ignore income taxes in this problem.) Monson Company is considering three investment opportunities with cash flows as described below:
Project A: Cash investment now $15,000
Cash inflow at the end of 5 years $21,000
Cash inflow at the end of 8 years $21,000
Project B: Cash investment now $11,000
Annual cash outflow for 5 years $ 3,000
Additional cash inflow at the end of 5 years $21,000 Project C: Cash investment now ... $21,000 Annual cash inflow for 4 years ... $11,000 Cash outflow at the end of 3 years ... $ 5,000 Additional cash inflow at the end of 4 years $15,000
Required: (Moderate) N & G
Compute the net present value of each project assuming Monson Company uses a 12%
discount rate.
COMPREHENSIVE
Accounting Rate of Return & Payback
269. (Ignore income taxes in this problem.) Ferris Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a 5-year useful life and zero salvage value.
Expected changes in annual revenues and expenses if the new machine is purchased are:
Increased revenues ... $63,000 Increased expenses:
Salary of additional operator .. $20,000
Supplies ... 9,000
Depreciation ... 12,000
Maintenance ... 4,000 45,000
Increased net income ... $18,000
Required: (Easy) N & G
a. Compute the payback period on the new equipment.
b. Compute the simple rate of return on the new equipment.
Accounting Rate of Return, Payback & NPV
270. Scottso has an investment opportunity costing $180,000 that is expected to yield the following cash flows over the next five years:
Year One $ 30,000
b. Find the book rate of return of the investment.
c. Find the NPV of the investment at a cutoff rate of 12%.
271. Scottso has an investment opportunity costing $300,000 that is expected to yield the following cash flows over the next six years:
Year One $75,000
b. Find the book rate of return of the investment.
c. Find the NPV of the investment at a cutoff rate of 10%.
272. The management of Elite Cookies Inc. is considering the purchase of a new shaping machine.
The machine will cost $100,000 and will have a useful life of 10 years with a salvage value of
$10,000 at the end of ten years. The investment will result in cost savings of $16,000 per year for each year of the machine's life. The tax rate is zero, and the appropriate discount rate for the company is 10%. (The present value factor for $1 received at the end of 10 years is .386, and the factor for $1 received annually for 10 years is 6.145.)
Required: Carter & Usry
(1) Compute the payback period.
(2) Compute the accounting rate of return on the average investment.
(3) Compute the net present value.
(Round answers to two decimal places.) Payback & NPV
273. (Present value tables needed to answer this question.) Wood Productions is considering the purchase of a new movie camera, which will be used for major motion pictures. The new camera will cost $30,000, have an eight-year life, and create cost savings of $5,000 per year.
The new camera will require $700 of maintenance each year. Wood Productions uses a discount rate of 9 percent.
REQUIRED: Barfield
a. Compute the net present value of the new camera.
b. Determine the payback period.
274. Treble Co. is considering an investment in a new product line. The investment would require an immediate outlay of $100,000 for equipment and an immediate investment of $200,000 in working capital. The investment is expected to generate a net cash inflow of $100,000 in year 1, $150,000 in year 2, and $200,000 in years 3 and 4. The equipment would be scrapped (for no salvage) at the end of the fourth year and the working capital would be liquidated. The equipment would be fully depreciated by the straight-line method over its four-year life.
REQUIRED: Barfield
(a) (Present value tables needed to answer this question.) If Treble uses a discount rate of 16 percent, what is the NPV of the proposed product line investment?
(b) What is the payback period for the investment?
Payback & IRR
275. Supply the missing data for each of the following proposals. (D) Horngren Proposal A Proposal B Proposal C
Initial investment (a) $62,900 $226,000
Annual net cash inflow $60,000 (c) (e)
Life, in years 10 6 10
Salvage value $0 $10,000 $0
Payback period in year (b) (d) 5.65
Internal rate of return 12% 24% (f)
NPV & PI
276. Racine Co. has the opportunity to introduce a new product. Racine expects the project to sell for $200 and to have per-unit variable costs of $130 and annual cash fixed costs of
$6,000,000. Expected annual sales volume is 125,000 units. The equipment needed to bring out the new product costs $7,200,000, has a four-year life and no salvage value, and would be depreciated on a straight-line basis. Working capital of $500,000 would be necessary to support the increased sales. Racine's cost of capital is 12% and its income tax rate is 40%.
Required: D, L & H 9e
a. Compute the NPV of this opportunity.
b. Compute the profitability index of this opportunity.
NPV & IRR
277. The Zero Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $20,960 and has predicted cash inflows of $5,000 per year for 10 years. It will have no salvage value.
Required: (M) Horngren
a. Using a required rate of return of 16%, determine the net present value of the investment proposal.
b. Determine the proposal's internal rate of return.
278. Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of
$15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered.
Required: (D) Horngren
a. If the company has a required rate of return of 14%, what is the net present value of the proposed investment?
b. What is the internal rate of return?
Payback, NPV & IRR
279. An investment opportunity costing $600,000 is expected to yield net cash flows of $120,000 annually for ten years.
Required: D, L & H 9e
a. Find the NPV of the investment at a cutoff rate of 12%.
b. Find the payback period of the investment.
c. Find the IRR on the investment.
280. An investment opportunity costing $180,000 is expected to yield net cash flows of $60,000 annually for five years.
Required: D, L & H 9e
a. Find the NPV of the investment at a cutoff rate of 12%.
b. Find the payback period of the investment.
c. Find the IRR on the investment.
281. Book & Bible Bookstore desires to buy a new coding machine to help control book inventories.
The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be
$4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000.
Required: (D) Horngren
a. Compute the net present value at a 14% required rate of return.
b. Compute the internal rate of return.
c. Determine the payback period of the investment.
282. The president of Eradicator Corp. is considering the purchase of new demolition equipment costing $100,000, with a useful life of five years and no salvage value. The new equipment would yield an annual after-tax cash flow of $29,129. An appropriate discount rate for this type of equipment is 12%. (The present value of an annuity of a dollar @ 12% for five years is 3.605. The present value of a dollar @ 12% received at the end of the fifth year is .567.)
Required: Carter & Usry
(1) Compute the payback period to the nearest tenth of a year.
(2) Compute the net present value to the nearest whole dollar.
(3) Compute the internal rate of return on the purchase.
(4) Should the equipment be purchased?
Accounting Rate of Return, Payback, NPV & IRR
283. Ignore income taxes in this problem.) Ursus, Inc., is considering a project that would have a ten-year life and would require a $1,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net income each year as follows:
Sales $2,000,000
Less variable expenses 1,400,000
Contribution margin 600,000
Less fixed expenses 400,000
Net income $ 200,000
All of the above items, except for depreciation of $100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company’s required rate of return is 12%.
Required: (Moderate) N & G
a. Compute the project’s net present value.
b. Compute the project’s internal rate of return, interpolating to the nearest tenth of a percent.
c. Compute the project’s payback period.
d. Compute the project’s simple rate of return.
Required Investment, Payback Period & NPV
284. Denali Company is evaluating a capital budgeting proposal, requiring an initial investment of
$45,000. The project will have a five-year life. The after-tax annual cash inflow from this investment is $12,000. The cost of capital is 10%. (The present value of $1 @ 10% received at the end of five years is .621. (The present value of $1 @ 10% received each year for five years is 3.791.)
Required: Carter & Usry
(1) What is the payback period?
(2) Compute the net present value of the project.
(3) What amount should Denali have invested five years ago, at 10% compounded annually, to have $45,000 now?
Required Investment, NPV & IRR
285 (Ignore income taxes in this problem.) Prince Company’s required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently.
Required: (Moderate) N & G
a. Machine A will cost $25,00 and have a life of 15 years. Its salvage value will be $1,000, and cost savings are projected at $3,500 per year. Compute the machine’s net present value.
b. How much will Prince Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for 8 years?
c. Machine C has a projected life of 10 years. What is the machine's internal rate of return if it costs $30,000 and will save $6,000 annually in cash operating costs? Interpolate to the nearest tenth of a percent. Would you recommend purchase? Explain.
Required Investment, Profitability Index & IRR
286. (Present value tables needed to answer this question.) Jane has an opportunity to invest in a project that will yield four annual payments of $12,000 with no salvage. The first payment will be received in exactly one year. On low-risk projects of this type, Jane requires a return of 6 percent. Based on this requirement, the project generates a profitability index of 1.03953.
REQUIRED: Barfield
a. How much is Jane required to invest in this project?
b. What is the internal rate of return on Jane's project?
Net Cash Flow & Payback
287. Marquette Company is considering the purchase of a machine with the following characteristics.
Cost $150,000
Estimated useful life 10 years
Expected annual cash cost savings $35,000
Marquette's tax rate is 40%, its cost of capital is 12%, and it will use straight-line depreciation for the new machine.
Required: D, L & H 9e
a. Compute the annual after-tax cash flows for this project.
b. Find the payback period for this project.
Net Cash Flow & NPV
288. Tofte is considering the purchase of a machine. Data are as follows:
Cost $100,000
Useful life 10 years
Annual straight-line depreciation $ 10,000
Expected annual savings in cash operation costs $ 18,000 Tofte's cutoff rate is 12% and its tax rate is 40%.
Required: D, L & H 9e
a. Compute the annual net cash flows for the investment.
b. Compute the NPV of the project.
Net Cash Flow, Payback & NPV
289. Bilt-Rite Co. has the opportunity to introduce a new product. Bilt-Rite expects the product to sell for $60 and to have per-unit variable costs of $40 and annual cash fixed costs of
$3,000,000. Expected annual sales volume is 250,000 units. The equipment needed to bring out the new product costs $5,000,000, has a four-year life and no salvage value, and would be depreciated on a straight-line basis. Bilt-Rite's cost of capital is 10% and its income tax rate is 40%.
Required: D, L & H 9e
a. Find the increase in annual after-tax cash flows for this opportunity.
b. Find the payback period on this project.
c. Find the NPV for this project.
290. Reno Company is considering the purchase of a machine with the following characteristics.
Cost $160,000
Estimated useful life 5 years
Expected annual cash cost savings $56,000
Expected salvage value none
Reno's tax rate is 40%, its cost of capital is 12%, and it will use straight-line depreciation for the new machine.
Required: D, L & H 9E
a. Compute the annual after-tax cash flows for this project.
b. Find the payback period for this project.
c. Compute the NPV for this project.
291. Whitehall Co. has the opportunity to introduce a new product. Whitehall expects the project to sell for $40 and to have per-unit variable costs of $27 and annual cash fixed costs of
$1,500,000. Expected annual sales volume is 200,000 units. The equipment needed to bring out the new product costs $3,500,000, has a four-year life and no salvage value, and would be depreciated on a straight-line basis. Whitehall's cutoff rate is 10% and its income tax rate is 40%.
Required: D, L & H 9E
a. Find the increase in annual after-tax cash flows for this opportunity.
b. Find the payback period on this project.
c. Find the NPV for this project.
Net Cash Flow & PI
292. Zmolek Company is considering the purchase of a machine costing $700,000 with a useful life of 10 years. Annual cash cost savings are expected to be $200,000. Zmolek's income tax rate
is 40% and its cost of capital is 12%. Zmolek expects to use straight-line depreciation for tax purposes.
Required: D, L & H 9E
a. Compute the expected increase in annual net cash flow for this project.
b. Compute the profitability index for the project.
293. Cable Company is considering the purchase of a machine with the following characteristics.
Cost $100,000
Useful life 10 years
Expected annual cash cost savings $30,000
Cable's income tax rate is 40% and its cost of capital is 12%. Cable expects to use straight-line depreciation for tax purposes.
Required: D, L & H 9E
a. Compute the expected increase in annual net cash flow for this project.
b. Compute the profitability index for the project.
c. How would the profitability index for this project be affected if Cable were to use MACRS depreciation for tax purposes and the machine fell into the 7-year MACRS class?
(increase decrease not affected) Circle the appropriate answer.
Net Cash Flow, NPV & PI
294. Zenex is considering the purchase of a machine. Data are as follows:
Cost $240,000
Useful life 10 years
Annual straight-line depreciation $ ???
Expected annual savings in cash operation costs $ 80,000
Additional working capital needed $100,000
Zenex's cutoff rate is 12% and its tax rate is 40%.
Required: D, L & H 9E
a. Compute the annual net cash flows for the investment.
b. Compute the NPV of the project.
c. Compute the profitability index of the project.
295. Seiler is considering the purchase of a machine. Data are as follows:
Cost $2,000,000
Useful life 8 years
Annual straight-line depreciation $ ???
Expected annual savings in cash operation costs $ 750,000
Additional working capital needed $ 500,000
Seiler's cutoff rate is 12% and its tax rate is 40%.
Required: D, L & H 9E
a. Compute the annual net cash flows for the investment.
b. Compute the NPV of the project.
c. Compute the profitability index of the project.
Net Cash Flow, NPV & Sensitivity Analysis
Net Cash Flow, NPV & Sensitivity Analysis