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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.
11–210
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.
11–211
11–212
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
flows (a)
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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11–214
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
Investment required (a)
Ranked by project profitability index
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
11–215
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
Investment required (a)
Ranked by project profitability index
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the project profitability index. Show your work
11–216
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!
11–217
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
11–218
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!
11–219
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!
