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The net present value of the new system alternative is:
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91.
Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would
last for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000.
The machine would reduce labor and other costs by $96,000 per year. Additional working
capital of $6,000 would be needed immediately. All of this working capital would be
recovered at the end of the life of the machine. The company requires a minimum pretax
return of 18% on all investment projects.
The combined present value of the working capital needed at the beginning of the project
and the working capital released at the end of the project is closest to:
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92.
Lebert, Inc., is considering the purchase of a machine that would cost $380,000 and would
last for 7 years. At the end of 7 years, the machine would have a salvage value of $49,000.
The machine would reduce labor and other costs by $96,000 per year. Additional working
capital of $6,000 would be needed immediately. All of this working capital would be
recovered at the end of the life of the machine. The company requires a minimum pretax
return of 18% on all investment projects.
The net present value of the proposed project is closest to:
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93.
Dube Corporation is considering the following three investment projects:
Project
D
Project
E
Project
F
Investment required
$11,000
$41,000
$86,000
Present value of cash
inflows
$11,330
$46,330
$95,460
The profitability index of investment project E is closest to:
94.
Dube Corporation is considering the following three investment projects:
Project
D
Project
E
Project
F
Investment required
$11,000
$41,000
$86,000
Present value of cash
inflows
$11,330
$46,330
$95,460
Rank the projects according to the profitability index, from most profitable to least
profitable.
95.
The management of Keno Corporation is considering three investment projects-B, C, and
D. Project B would require an investment of $15,000, Project C of $50,000, and Project D
of $89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500
for Project C, and $96,120 for Project D.
The profitability index of investment project C is closest to:
96.
The management of Keno Corporation is considering three investment projects-B, C, and
D. Project B would require an investment of $15,000, Project C of $50,000, and Project D
of $89,000. The present value of the cash inflows would be $16,350 for Project B, $56,500
for Project C, and $96,120 for Project D.
Rank the projects according to the profitability index, from most profitable to least
profitable.
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Essay Questions
97.
Flamio Corporation is considering a project that would require an initial investment of
$210,000 and would last for 6 years. The incremental annual revenues and expenses for
each of the 6 years would be as follows:
Sales
$203,000
Variable expenses
45,000
Contribution margin
158,000
Fixed expenses:
Salaries
$24,000
Rents
37,000
Depreciation
31,000
Total fixed expenses
92,000
Net operating income
$66,000
Net operating income
Add noncash deduction for depreciation
31,000
Annual net cash inflow
$97,000
At the end of the project, the scrap value of the project’s assets would be $24,000.
Required:
Determine the payback period of the project. Show your work!
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98.
The management of Sobus Corporation is considering a project that would require an
initial investment of $458,000 and would last for 9 years. The annual net operating income
from the project would be $58,000, including depreciation of $48,000. At the end of the
project, the scrap value of the project’s assets would be $26,000.
Required:
Determine the payback period of the project. Show your work!
99.
Alesi Corporation is considering purchasing a machine that would cost $243,600 and have
a useful life of 8 years. The machine would reduce cash operating costs by $76,125 per
year. The machine would have a salvage value of $60,900 at the end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
100.
Betterway Pharmacy has purchased a small auto for delivery of prescriptions. The auto
cost $30,000 and will be usable for five years. Delivery of prescriptions (which the
pharmacy has never done before) should increase revenues by at least $29,000 per year.
The cost of these prescriptions will be about $21,000 per year. The pharmacy depreciates
all assets by the straight-line method.
Required:
a. Compute the payback period on the new auto.
b. Compute the simple rate of return of the new auto.
101.
Swaggerty Corporation is considering purchasing a machine that would cost $462,000 and
have a useful life of 7 years. The machine would reduce cash operating costs by $115,500
per year. The machine would have no salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
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102.
Consider the following three investment opportunities:
Project I would require an immediate cash outlay of $10,000 and would result in cash
savings of $3,000 each year for 5 years.
Project II would require cash outlays of $3,000 per year and would provide a cash inflow
of $30,000 at the end of 5 years.
Project III would require a cash outlay of $10,000 now and would provide a cash inflow of
$30,000 at the end of 5 years.
Required:
The discount rate is 14%. Use the net present value method to determine which, if any, of
the three projects is acceptable.
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103.
The management of Basler Corporation is considering the purchase of a machine that
would cost $440,000, would last for 5 years, and would have no salvage value. The
machine would reduce labor and other costs by $128,000 per year. The company requires
a minimum pretax return of 12% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
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104.
Bill Anders retires in 5 years. He would have to purchase equipment costing $500,000 to
equip the outlet and invest an additional $150,000 for inventories and other working
capital needs. Other outlets in the fast-food chain have an annual net cash inflow of about
$160,000. Mr. Anders would close the outlet in 5 years. He estimates that the equipment
could be sold at that time for about 10% of its original cost and the working capital would
be released for use elsewhere. Mr. Anders’ required rate of return is 16%.
Required:
What is the investment’s net present value? Is this an acceptable investment?
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105.
Burba Inc. is considering investing in a project that would require an initial investment of
$200,000. The life of the project would be 5 years. The annual net cash inflows from the
project would be $60,000. The salvage value of the assets at the end of the project would
be $30,000. The company uses a discount rate of 17%.
Required:
Compute the net present value of the project.