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11–175

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.

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