74.
Delta, Inc. is considering the investment of $75,000 in a new machine. The machine will
generate cash flow of $16,800 per year for each year of its seven-year life and will have a
salvage value of $12,000 at the end of its life. Delta Inc.’s cost of capital is 14% percent.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and
round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of
capital? Explain your answer.
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75.
Springfield Manufacturing Co. is considering the investment of $60,000 in a new machine.
The machine will generate cash flow of $7,500 per year for each year of its 15 year life and
will have a salvage value of $4,000 at the end of its life. Springfield’s cost of capital is 10%.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and
round all answers to the nearest $1.
(b.) Calculate the present value ratio of the investment.
(c.) What will the internal rate of return on this investment be relative to the cost of
capital? Explain your answer.
(d.) Calculate the payback period of the investment.
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76.
The following data have been collected by capital budgeting analysts at Halda, Inc.
concerning an investment in an expansion of the company’s product line. Analysts
estimate that an investment of $210,000 will be required to initiate the project at the
beginning of 2016. Estimated cash returns from the new product line are summarized in
the following table; assume that the returns will be received in lump sum at the end of
each year.
Year
Amount of Cash Return
2016
$90,000
2017
80,000
2018
70,000
2019
60,000
The new product line will also require an investment in working capital of $30,000; this
investment will become available for other purposes at the end of the project. Salvage
value of machinery and equipment at the end of the product line’s life is expected to be
$20,000. The cost of capital used in Hilda, Inc.’s capital budgeting analysis is 10%.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and
round all answers to the nearest $1.
(b.) Calculate the present value ratio of the investment.
(c.) What will the internal rate of return on this investment be relative to the cost of
capital? Explain your answer.
(d.) Calculate the payback period of the investment.
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77.
Digital Devices, Inc. has received a special order to manufacture 10,000 CD ROM drives
for an Italian computer manufacturer. Digital determines that the order will not affect its
current domestic sales of CD ROM drives and because of the special nature of the order
no sales commission would be paid. However, to process the order for export, an
additional handling cost of $10 per unit is estimated. The order indicates that the price of
the drives cannot exceed $200.
The company has the capacity to produce 100,000 units annually but is currently
operating at 75% of available capacity. Unit selling price and costs, based on estimated
actual capacity being utilized, are as follows:
Selling price
$260
Expenses:
Direct materials
$80
Direct labor
40
Variable manufacturing overhead
50
Fixed manufacturing overhead
30
Sales commission
26
Fixed administrative expenses
8
Total
$234
(a.) Prepare a relevant cost analysis showing the effect on profit if the company accepts
the special order.
(b.) How would your analysis change if Digital Devices, Inc., was producing and selling
100,000 units annually?
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78.
SOFT Micro Co., sells part #1973 for $240 per unit and the standard cost of producing
each unit of part #1973 is determined as follows:
Direct material (5 lbs. × $4 per lb.)
$20
Direct labor (2 hrs. @ $20 per hr.)
40
Overhead (2 hrs. @ $70 per hr.)
140
Total
$200
SOFT received a special order for 1,000 units of part #1973. The only additional cost to
SOFT is a special packaging requirement that would cost $10 per unit.
(a.) If SOFT were currently able to sell all of its production of part #1973, what would be
the minimum sales price that SOFT should consider for this special order?
(b.) Assume that SOFT has enough idle capacity to produce 1,000 units of part #1973 and
that overhead is 20% variable. If SOFT wants to increase its operating profit by $110,000,
what price per unit would SOFT charge for the special order?
Current selling price
Special packaging cost
Minimum unit price
$250
Relevant costs for special order:
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79.
Acme Company is considering replacing outdated production equipment that will allow for
production cost savings of $20,000 per month. The new equipment will have a five-year
life and cost $800,000, with an estimated salvage value of $50,000. Acme’s cost of capital
is 10%.
Calculate the payback period and the accounting rate of return for the new production
equipment.
80.
OldSchool Corp. is reviewing its method of evaluating capital expenditure proposals using
the accounting rate of return method. A recent proposal involved a $200,000 investment in
a machine that had an estimated useful life of five years and an estimated salvage value
of $20,000. The cash flow from the new machine was expected to increase net income
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before depreciation expense by $56,000 per year. OldSchool’s current policy for approving
a new investment is that it have a rate of return of 12% and a payback period of three
years or less.
(a) Calculate the accounting rate of return on this investment for the first year. Assume
straight-line depreciation. Based on this analysis, would the investment be made? Explain.
(b) Calculate the payback period for this investment. Based on this analysis, would the
investment be made? Explain.
(c) Comment on OldSchool’s current policy for capital expenditure proposals