89. Westland College has a telephone system that is in poor condition. The system either can
be overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present System New System
Purchase cost when new $150,000 $200,000
Accumulated depreciation $140,000 –
Overhaul costs needed now $130,000 –
Annual cash operating costs $80,000 $70,000
Salvage value now $60,000 –
Salvage value in 8 years $52,000 $65,000
Working capital required – $100,000
Westland College uses a 10% discount rate and the total cost approach to net present value
analysis. The working capital required under the new system would be released for use
elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of
eight years.
The net present value of overhauling the present system is closest to:
90. Westland College has a telephone system that is in poor condition. The system either can
be overhauled or replaced with a new system. The following data have been gathered concerning
these two alternatives:
Present System New System
Purchase cost when new $150,000 $200,000
Accumulated depreciation $140,000 –
Overhaul costs needed now $130,000 –
Annual cash operating costs $80,000 $70,000
Salvage value now $60,000 –
Salvage value in 8 years $52,000 $65,000
Working capital required – $100,000
Westland College uses a 10% discount rate and the total cost approach to net present value
analysis. The working capital required under the new system would be released for use
elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life of
eight years.
The net present value of the new system alternative is:
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:
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:
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.
11–90
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
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!
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!
11–92
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.
11–95
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.
11–97
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.
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!
11-100
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?