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11-208

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.

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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.

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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:

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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

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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

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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!

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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!

Topic Area: The Simple Rate of Return Method

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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!

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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!

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