Problem 13-24 (continued)
4. The formula for the internal rate of return is:
Investment required
Factor of the internal=
rate of return Annual net cash inflow
Problem 13-26 (30 minutes)
1. The annual incremental net operating income can be determined as
follows:
Ticket revenue (50,000 × $3.60) …………….
$180,000
Selling and administrative expenses:
Salaries …………………………………………..
Insurance ………………………………………..
Utilities ……………………………………………
Depreciation* …………………………………..
Maintenance …………………………………….
Total selling and administrative expenses ….
139,500
Net operating income …………………………..
$ 40,500
*$330,000 ÷ 12 years = $27,500 per year.
2. The simple rate of return is:
Annual incremental net operating income
Simple rate=
of return Initial investment (net of salvage from old equipment)
$40,500 $40,500
= = = 15%
$330,000 – $60,000 $270,000
Yes, the water slide would be constructed. Its return is greater than the
specified hurdle rate of 14%.
3. The payback period is:
Investment required (net of salvage from old equipment)
Payback =
period Annual net cash inflow
$330,000 – $60,000 $270,000
= = = 3.97 years (rounded)
$68,000* $68,000*
*Net operating income + Depreciation = Annual net cash flow
$40,500 + $27,500 = $68,000.
Yes, the water slide would be constructed. The payback period is within
the 5 year payback required by Mr. Sharkey.
Problem 13-27 (continued)
2. The net present value is computed as follows:
Now
1
2
3
4
5
Purchase of equipment .
$(200,000)
Working capital …………
(2,000)
Annual net cash flows ..
$49,434
$49,434
$49,434
$49,434
$49,434
Working capital
released ………………….
2,000
Salvage value …………..
________
______
______
______
______
20,000
Total cash flows (a) …..
$(202,000)
$49,434
$49,434
$49,434
$49,434
$71,434
Discount factor (b) …….
1.000
0.909
0.826
0.751
0.683
0.621
Present value (a)×(b) ..
$(202,000)
$44,936
$40,832
$37,125
$33,763
$44,361
Net present value ……..
$(983)
Problem 13-29 (45 minutes)
1. A net present value computation for each investment follows:
Common stock:
Now
1
2
3
Purchase of the stock …
$(95,000)
Sales of the stock ……..
________
______
______
160,000
Total cash flows (a) …..
$(95,000)
$0
$0
$160,000
Discount factor (b) …….
1.000
0.862
0.743
0.641
Present value (a)×(b) ..
$(95,000)
$0
$0
$102,560
Net present value ……..
$7,560
Preferred stock:
Now
1
2
3
Purchase of the stock …
$(30,000)
Annual cash dividend …
$1,800
$1,800
$1,800
Sales of the stock ……..
________
______
______
27,000
Total cash flows (a) …..
$(30,000)
$1,800
$1,800
$28,800
Discount factor (b) …….
1.000
0.862
0.743
0.641
Present value (a)×(b) ..
$(30,000)
$1,552
$1,337
$18,461
Net present value ……..
$(8,650)
Purchase of the bonds..
$(50,000)
Annual interest income .
Sales of the bonds …….
________
______
______
52,700
Total cash flows (a) …..
$(50,000)
$6,000
$6,000
$58,700
Discount factor (b) …….
1.000
0.862
0.743
0.641
Present value (a)×(b) ..
$(50,000)
$5,172
$4,458
$37,627
Net present value ……..
$(2,743)
Problem 13-30 (60 minutes)
1. Computation of the annual net cost savings:
Savings in labor costs (25,000 hours × $16 per hour) .
$400,000
Savings in inventory carrying costs ………………………..
210,000
Total ……………………………………………………………….
610,000
Less increased power and maintenance cost
($2,500 per month × 12 months) ……………………….
30,000
Annual net cost savings ………………………………………
$580,000
2. The net present value is computed as follows:
Now
1
2
3
4
5
Cost of the robot …….
$(1,600,000)
Installation &
software ………………..
(450,000)
Annual net cost
savings………………….
$580,000
$580,000
$580,000
$580,000
$580,000
Inventory reduction …
400,000
Salvage value (old) ….
_________
_______
_______
_______
_______
70,000
Total cash flows (a) …
$(2,050,000)
$980,000
$580,000
$580,000
$580,000
$650,000
Discount factor (b) …..
1.000
0.833
0.694
0.579
0.482
0.402
Present value
(a)×(b) …………………
$(2,050,000)
$816,340
$402,520
$335,820
$279,560
$261,300
Present value ………….
$45,540