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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 ..................................................
$85,000
Insurance ...............................................
4,200
Utilities ...................................................
13,000
Depreciation* .........................................
27,500
Maintenance ...........................................
9,800
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)
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
