Chapter 12
144. Dale Davis Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a
salvage value of $10,000 in 4 years. It would provide annual operating cash savings of $10,000, as follows:
Old Machine New Machine
Salaries $40,000 $36,000
Supplies 7,000 5,000
Maintenance 9,000 5,000
Total $56,000 $46,000
If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine
is not purchased, the old machine will be disposed of in 4 years at a predicted salvage value of $2,000. The old machine’s
present book value is $40,000. If kept, in 1 year the old machine will require repairs predicted to cost $35,000.
Dale Davis‘s cost of capital is 14%.
Required: Should the new machine be purchased? Why or why not?
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145. Fill in the lettered blanks in the following table:
Investment A Investment B Investment C
Amount of investment $40,000 (A) $20,000
Economic life in years 10 5 8
Annual cash flow $ 5,000 (B) $ 2,500
Payback period in years (C) 4 (D)
Present value of cash flows (E) $33,000 (F)
Net present value $ 5,500 $ 3,000 ($1,000)
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146. Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash
benefits/savings associated with the system are:
Decreased waste $ 75,000
Increased quality 100,000
Decrease in operating costs 62,500
Increase in on-time deliveries 12,500
The system will cost $750,000 and will last ten years. The company’s cost of capital is 10%.
Required:
A. What is the payback period for the flexible manufacturing system?
B. What is the NPV for the flexible manufacturing system?
147. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
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8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Jimmy Reynolds is considering investing $12,000 in a project with the following cash revenues and expenses:
Revenues Expenses
Year 1 $20,000 $18,000
Year 2 $22,000 $19,000
Year 3 $22,000 $20,000
Year 4 $22,000 $17,000
Year 5 $25,000 $17,000
Jimmy requires a minimum rate of return of 8%.
A. Calculate the net cash inflows in each of the 5 years.
B. What is the payback period?
C. What is the net present value of the investment?
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148. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Jasmine Company is considering an investment costing $20,000. The investment would return $8,000 per year in each of
three years. Jasmine requires a minimum rate of return of 6%.
A. What is the payback period for the investment?
B. What is the net present value of the investment?
C. The internal rate of return is greater than __________________% and less than __________________%.
Chapter 12
149. Present value of an Annuity of $1 in Arrears
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 4.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Lyster Company wants to buy a new machine that will be able to perform many of the steps in the manufacturing process
that they currently have to do manually. The hope is that it will reduce the amount of time it takes to create one unit and
reduce the number of defective units. The machine requires an investment of $750,000. The machine will last six years
with no expected salvage value. The expected after-tax cash flows associated with the project are as follows:
Year Cash revenues Cash expenses
1 $825,000 $510,000
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2 825,000 510,000
3 825,000 510,000
4 825,000 510,000
5 825,000 510,000
6 825,000 510,000
Required:
A. Compute the payback period for the new machine.
B. Compute the new machine’s ARR.
C. Compute the investment’s NPV, assuming a required rate of return of 12%.
150. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
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6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Geary Company is considering an investment costing $110,000. The investment would return $40,000 per year in each of
three years. Geary requires a minimum rate of return of 10%.
A. What is the payback period for the investment?
B. Using the Present Value of an Annuity of $1 table, calculate the net present value of the investment.
C. The internal rate of return is greater than __________________% and less than __________________%.
D. Now assume that the investment includes equipment that can be sold at the end of the third year for $10,000.
What is the present value of this investment?
Chapter 12
151. Present value of an Annuity of $1 in Arrears
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 4.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Aragon Company is considering an investment in equipment that will have an initial cost of $560,290 and yield annual net
cash inflows of $90,000. Yearly depreciation will be $56,000. The equipment is expected to be useful for 10 years and
then it will be scrapped. Aragon requires a minimum rate of return of 10%.
A. What is the payback period?
B. What is the accounting rate of return?
C. What is the net present value?
D. What is the approximate internal rate of return?
Chapter 12
152. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Howard-Parr Company is considering an investment that will have an initial cost of $500,000 and yield annual net cash
inflows of $130,000. Yearly depreciation will be $100,000. The equipment is expected to be useful for five years, at
which point it will be scrapped with no salvage value. Howard-Parr requires a minimum rate of return of 10%.
A. What is the accounting rate of return?
B. What is the net present value? Is the investment acceptable?
C. Now suppose that Howard-Parr believes it can sell the equipment at the end of 5 years for $50,000. What is the
net present value? Is the investment acceptable?
D. What can you say about the IRR in the first case (no salvage value) versus the IRR in the second case ($50,000
salvage value)?
Chapter 12
153. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
A company is considering two modifications to its current manufacturing process. The after-tax cash flows associated
with the two investments are:
Chapter 12
Year Project I Project II
0 $(37,500) $(150,000)
1 — 91,075
2 50,460 91,075
The company’s cost of capital is 12%.
A. Compute the net present value for each investment.
B. Computer the internal rate of return for each investment.
C. Which project is better? Explain your reasoning.
154. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
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7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being
considered. After-tax inflows for the two competing projects are:
Year Fallon Equipment Inc. Toller Equipment Inc.
1 $275,000 $70,000
2 225,000 70,000
3 185,000 285,000
4 140,000 330,000
5 65,000 390,000
Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of 5 years with
no salvage value.
Required:
A. Assuming a discount rate of 8%, compute the net present value of each piece of equipment.
B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even
cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two?
Assume an 8% discount rate.
Chapter 12
155. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Chapter 12
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Durrel Company is considering two different modifications to its current manufacturing process. The after-tax cash flows
associated with the two investments are as follows:
Year Project A Project B
0 $(220,000) $(220,000)
1 – 88,500
2 – 88,500
3 285,000 88,500
Durrel’s cost of capital is 6%.
Required:
A. Compute the NPV for each investment and state which project should be chosen based on the NPV.
B. Compute the IRR for each investment and state which project should be chosen based on the IRR.
Chapter 12
156. Present value of an Annuity of $1 in Arrears
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 4.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Cleves Company is considering two projects.
Project X Project Y
Initial investment $500,000 $100,000
Annual cash flows $88,500 $34,320
Life of the project 10 years 4 years
Depreciation per year $50,000 $25,000
Cleves requires a minimum rate of return of 8%.
A. What is the accounting rate of return for each project?
B. What is the net present value for each project?
C. What is the internal rate of return for each project?
D. Given that only one project can be selected, which project should be chosen? Explain your reasoning.
Chapter 12
Chapter 12
157. can be used as a rough measure of risk and liquidity
158. can be used to determine whether or not an investment will negatively affect key financial ratios
159. interest rate used to discount future cash flows
160. assumes that all future cash inflows earn the required rate of return
161. assumes that all future cash inflows earn the same rate of return as the project itself
162. a series of equal future cash flows
163. comparison of actual benefits and costs of a project with the expected benefits and costs
Chapter 12
164. is the best method discounting model to use for mutually exclusive competing projects
165. earning of interest on interest