Ex. 26.3
(Continued on the following page)
Thus, the return on average investment of Investment A is:
= 23.1%
$6,000
$26,000
Average Estimated Net Income
= $26,000Average Investment $44,000 + $8,000
2
=
=
Average Investment
The missing data for each investment proposal are solved for as follows:
Investment A
Average Investment = Original Cost + Salvage
2
Salvage Value = ($27,000 x 2) $50,000 = $4,000
$50,000 + Salvage Value
2
$27,000 =
2
Average Investment =
Average Investment = $5,400 ÷ 20% = $27,000
Thus, the estimated salvage value of Investment C is:
Original Cost + Salvage
Average Investment $ ? = 20%
Ex. 26.4 a.
b.
c.
Ex. 26.3
(continued)
Investment D
The average investment of Investment D is:
Average Estimated Net Income =$ ? = 15%
$4,500
Average Investment
Investment Cost = ($30,000 × 2) – $4,000 = $56,000
$ ? + $4,000
= $30,000
=2
Thus, the original investment cost of Investment D is:
Original Cost + Salvage Value
$40,000 × .061 = $2,440
$24,000 × 5.019 = $120,456
($16,000 × 3.352) + ($20,000 × .497) = $53,632 + $9,940 = $63,572
Average Investment 2
=
Ex. 26.5
(continued)
Given a net present value of zero, we can conclude that the discounted present value of the
future cash flows associated with Investment B must equal the investment’s original cost of
$141,250.
Thus, the annual cash outflows associated with the investment can be computed as follows:
($37,000 – Cash Outflows) × 5.650 = $141,250
Ex. 26.7 a.
$600,000
$250,000
The payback period of the Seattle Sound investment is computed as follows:
= = 2.4 years
Amount to Be Invested
Estimated Annual Net Cash
Ex. 26.9
b.
There are numerous controls that might be implemented to discourage the overstatement
of capital budgeting estimates. First, whenever possible, assumptions and projections
Ex. 26.10 b.
Perhaps the most important nonfinancial consideration for EnterTech to
consider is the future demand for portable CD players. If demand for the
product is less than five years, the investment in the new machine is far less
Ex. 26.14
5% rate 5% NPV 8% rate 8% NPV
Amount
SOLUTIONS TO PROBLEMS SET A
30 Minutes, Strong PROBLEM 26.1A
TOYING WITH NATURE
a.
Estimated sales (80,000 units @ $6) 480,000$
Less estimated incremental costs:
V
ariable manufacturing costs (80,000 units @ $2.50) 200,000$
Fixed manufacturing costs (except depreciation) 45,000
Depreciation expense [($350,000 – $20,000) ÷ 3] 110,000
Selling and general expenses 55,000 410,000
Income before income taxes 70,000$
V
ariable manufacturing costs 200,000$
Fixed costs (other than depreciation) 45,000
Selling and general expenses 55,000
Income taxes expense 28,000 328,000
$152,000
(2)
(3) Net present value of project, discounted at 15%:
Total present value of annual net cash flows ($152,000 × 2.283) 347,016$
TOYING WITH NATURE
Schedule of Estimated Net Income
(350,000 + $20,000) ÷ 2
42,000
Return on average investment:
Annual Net Income
Average Investment =
2.3 years
= 22.7%
Annual Net Cash Flow ==
PROBLEM 26.2A
HIBBING TECHNOLOGY
a.
(1)
25 Minutes, Medium
Proposal A
Payback period:
$504,000 ÷ $105,000 = 4.8 years
25 Minutes, Medium PROBLEM 26.3
A
WELSH INDUSTRIES
a.
(1)
(1)
Proposal A
Payback period:
$330,000 ÷ $90,000 = 3.7 years
$375,000 ÷ $88,000 = 4.3 years
Payback period: