11-113
112. Mark Stevens is considering opening a hobby and craft store. He would invest $50,000 to
purchase equipment and furnishings and another $100,000 for inventories and other working
capital needs. Rent on the building used by the business will be $25,000 per year. In addition to
building rent, other annual cash outflows for operating costs will amount to $44,000. Mark
estimates that the annual cash inflow from the business will amount to $100,000. Mark plans to
operate the business for only six years. He estimates that the equipment and furnishings could
be sold at that time for about 10% of its original cost. Mark’s discount rate is 16%. All cash flows,
except for the initial investment, would occur at the ends of the years.
Required:
Compute the net present value of this investment.
Annual cash inflows $100,000
Annual cash outflows:
Building rent $25,000
Other annual cash outflows 44,000 69,000
Annual net cash inflow $31,000
113. Dunay Corporation is considering investing $510,000 in a project. The life of the project
would be 4 years. The project would require additional working capital of $24,000, which would
be released for use elsewhere at the end of the project. The annual net cash inflows would be
$162,000. The salvage value of the assets used in the project would be $41,000. The company
uses a discount rate of 10%.
Required:
Compute the net present value of the project.
11-116
114. Farah Corporation has provided the following data concerning a proposed investment
project:
Initial investment $320,000
Life of the project 5 years
Working capital required $14,000
Annual net cash inflows $88,000
Salvage value $44,000
The company uses a discount rate of 11%. The working capital would be released at the end of
the project.
Required:
Compute the net present value of the project.
115. Dimpson Corporation is considering the following three investment projects:
Project P Project Q Project R
Investment required $15,000 $50,000 $71,000
Present value of cash inflows $15,150 $54,500 $75,970
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
116. The management of Grayer Corporation is considering the following three investment
projects:
Project Q Project R Project S
Investment required $32,000 $40,000 $76,000
Present value of cash inflows $36,480 $42,400 $84,360
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
117. The management of Kleppe Corporation is investigating automating a process by
replacing old equipment by a new machine. The old equipment would be sold for scrap now for
$19,000. The new machine would cost $180,000, would have a 9 year useful life, and would have
no salvage value. By automating the process, the company would save $30,000 per year in cash
operating costs.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
118. The management of Moya Corporation is investigating purchasing equipment that would
cost $336,000 and have an 8 year life with no salvage value. The equipment would allow an
expansion of capacity that would increase sales revenues by $288,000 per year and cash
operating expenses by $164,000 per year.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
119. Shiffler Corporation is contemplating purchasing equipment that would increase sales
revenues by $246,000 per year and cash operating expenses by $133,000 per year. The
equipment would cost $275,000 and have a 5 year life with no salvage value. The annual
depreciation would be $55,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!
120. Hinck Corporation is investigating automating a process by purchasing a new machine for
$520,000 that would have a 8 year useful life and no salvage value. By automating the process,
the company would save $134,000 per year in cash operating costs. The company’s current
equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new
machine would be $65,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show
your work!