74. Jimba’s, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life
of 10 years. The following annual donut sales and expenses are projected:
Sales $30,000
Expenses:
Flour, etc., required in making donuts $15,000
Salaries 8,000
Depreciation 2,000 25,000
Net operating income $5,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The payback period on the new machine is closest to:
75. Jimba’s, Inc., has purchased a new donut maker. It cost $20,000 and has an estimated life
of 10 years. The following annual donut sales and expenses are projected:
Sales $30,000
Expenses:
Flour, etc., required in making donuts $15,000
Salaries 8,000
Depreciation 2,000 25,000
Net operating income $5,000
Assume cash flows occur uniformly throughout a year except for the initial investment.
The simple rate of return on the new machine is closest to:
76. Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the
purchase of a machine to produce baseball bats. The machine will cost $60,000 and have a 10–
year useful life. The following annual revenues and expenses are projected:
Sales $40,000
Less expenses:
Out-of-pocket production costs $15,000
Selling expenses 9,000
Depreciation 6,000 30,000
Net operating income $10,000
The machine will have no salvage value. Assume cash flows occur uniformly throughout a year
except for the initial investment.
The payback period for the new machine is about:
77. Pro-Mate, Inc. is a producer of athletic equipment. The company is considering the
purchase of a machine to produce baseball bats. The machine will cost $60,000 and have a 10–
year useful life. The following annual revenues and expenses are projected:
Sales $40,000
Less expenses:
Out-of-pocket production costs $15,000
Selling expenses 9,000
Depreciation 6,000 30,000
Net operating income $10,000
The machine will have no salvage value. Assume cash flows occur uniformly throughout a year
except for the initial investment.
The simple rate of return would be about:
78. Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The
following information has been gathered relative to this decision:
Present Equipment New Equipment
Purchase cost new $50,000 $48,000
Remaining book value $30,000 –
Cost to rebuild now $25,000 –
Major maintenance at the end of 3 years $8,000 $5,000
Annual cash operating costs $10,000 $8,000
Salvage value at the end of 5 years $3,000 $7,000
Salvage value now $9,000 –
Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.
Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the cash flows that occur now is:
79. Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The
following information has been gathered relative to this decision:
Present Equipment New Equipment
Purchase cost new $50,000 $48,000
Remaining book value $30,000 –
Cost to rebuild now $25,000 –
Major maintenance at the end of 3 years $8,000 $5,000
Annual cash operating costs $10,000 $8,000
Salvage value at the end of 5 years $3,000 $7,000
Salvage value now $9,000 –
Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.
Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:
80. Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The
following information has been gathered relative to this decision:
Present Equipment New Equipment
Purchase cost new $50,000
$48,000
Remaining book value $30,000 –
Cost to rebuild now $25,000 –
Major maintenance at the end of 3 years $8,000
$5,000
Annual cash operating costs $10,000
$8,000
Salvage value at the end of 5 years $3,000
$7,000
Salvage value now $9,000 –
Carlson uses the total cost approach to net present value analysis and a discount rate of 12%.
Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson
Manufacturing will have no future use for the equipment.
If the equipment is rebuilt, the present value of the cash flows that occur now is:
81. The management of Mashiah Corporation is considering the purchase of a machine that
would cost $290,000, would last for 6 years, and would have no salvage value. The machine
would reduce labor and other costs by $102,000 per year. The company requires a minimum
pretax return of 13% on all investment projects.
The present value of the annual cost savings of $102,000 is closest to:
82. The management of Mashiah Corporation is considering the purchase of a machine that
would cost $290,000, would last for 6 years, and would have no salvage value. The machine
would reduce labor and other costs by $102,000 per year. The company requires a minimum
pretax return of 13% on all investment projects.
The net present value of the proposed project is closest to:
83. The Sawyer Corporation has $80,000 to invest and is considering two different projects, X
and Y. The following data are available on the projects:
Project X Project Y
Cost of equipment needed now $80,000 –
Working capital requirement – $80,000
Annual cash operating inflows $23,000 $18,000
Salvage value in 5 years $6,000 –
Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be
released for use elsewhere. Sawyer’s discount rate is 12%.
The net present value of project X is closest to:
84. The Sawyer Corporation has $80,000 to invest and is considering two different projects, X
and Y. The following data are available on the projects:
Project X Project Y
Cost of equipment needed now $80,000 –
Working capital requirement – $80,000
Annual cash operating inflows $23,000 $18,000
Salvage value in 5 years $6,000 –
Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be
released for use elsewhere. Sawyer’s discount rate is 12%.
The net present value of project Y is closest to:
85. Clairmont Corporation is considering the purchase of a machine that would cost $150,000
and would last for 5 years. At the end of 5 years, the machine would have a salvage value of
$18,000. By reducing labor and other operating costs, the machine would provide annual cost
savings of $37,000. The company requires a minimum pretax return of 12% on all investment
projects.
The present value of the annual cost savings of $37,000 is closest to:
86. Clairmont Corporation is considering the purchase of a machine that would cost $150,000
and would last for 5 years. At the end of 5 years, the machine would have a salvage value of
$18,000. By reducing labor and other operating costs, the machine would provide annual cost
savings of $37,000. The company requires a minimum pretax return of 12% on all investment
projects.
The net present value of the proposed project is closest to:
87. Allen College has a telephone system that is in poor condition. The system can be either
overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present
System Proposed
New System
Purchase cost when new $100,000 $150,000
Accumulated depreciation $90,000 –
Overhaul cost needed now $80,000 –
Annual cash operating costs $30,000 $20,000
Salvage value now $10,000 –
Salvage value in 8 years $2,000 $15,000
Working capital required – $50,000
Allen College uses a 12% discount rate and the total cost approach to net present value analysis.
Both alternatives are expected to have a useful life of eight years.
The net present value of the alternative of overhauling the present system is closest to:
88. Allen College has a telephone system that is in poor condition. The system can be either
overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present
System Proposed
New System
Purchase cost when new $100,000 $150,000
Accumulated depreciation $90,000 –
Overhaul cost needed now $80,000 –
Annual cash operating costs $30,000 $20,000
Salvage value now $10,000 –
Salvage value in 8 years $2,000 $15,000
Working capital required – $50,000
Allen College uses a 12% discount rate and the total cost approach to net present value analysis.
Both alternatives are expected to have a useful life of eight years.
The net present value of the alternative of replacing the present system with the proposed new
system is closest to:
