Chapter 9 – Capital Budgeting
9-21
Problem 9-25, continued
c. No, Chester should not invest in CIM since the negative NPV and
d.
Cash Flow
Timing
Amount
12% PV
Factor
Present
Value
Purchase price
Year 0
($6,000,000)
1.0000
($6,000,000)
Working capital
Year 0
(600,000)
1.0000
(600,000)
Salvage value, old
Year 0
1.0000
75,000
Operating cost
savings
Years 1-10
840,000
5.6502
4,746,168
Scrap & rework
savings
Years 1-10
150,000
5.6502
847,530
Rent savingsa
Years 1-10
120,000
5.6502
678,024
Working capital
release
Year 10
600,000
.3220
193,200
Salvage value, new
Year 10
200,000
.3220
64,400
Net present value
$4,322
9-22
Problem 9-26
a. A 10% increase in sales will generate at 10% increase in contribution
margin.
Sales
$7,500,000
Less:
Variable COGS
3,000,000
Variable sellinga
600,000
Contribution margin
3,900,000
× 10%
Increased contribution margin
$ 390,000
$390,000
c.
Accounting rate of return =
$1,800,000
y ears5
$1,800,000
– $390,000
=
$1,800,000
$360,000 – $390,000
=
1.67%
Chapter 9 – Capital Budgeting
Problem 9-27
a.
Cash Flow
Timing
Amount
16% PV
Factor
Present
Value
Franchise fee
Year 0
($30,000)
1.0000
($ 30,000)
Building
Year 0
(450,000)
1.0000
(450,000)
Equipment purchase
Year 0
(200,000)
1.0000
(200,000)
Equipment salvage
Year 5
10,000
.4761
4,761
Equipment purchase
Year 5
(200,000)
.4761
(95,220)
Equipment salvage
Year 10
10,000
.2267
2,267
Equipment purchase
Year 10
(200,000)
.2267
(45,340)
Equipment salvage
Year 15
10,000
.1079
1,079
Revenue
Years 1-15
5.5755
5,296,725
Food costsa
Years 1-15
(342,000)
5.5755
(1,906,821)
Cash operating costs
Years 1-15
(425,000)
5.5755
(2,369,588)
Building salvage
Year 15
50,000
.1079
5,395
Net present value
$ 213,258
Year
Cash inflow
Cumulative Cash inflow
1
$183,000a
$183,000
2
183,000
366,000
3
183,000
549,000
4
183,000
732,000
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
9-24
Problem 9-27, continued
period.
e. Ryan has assumed constant sales revenue and costs throughout the
Chapter 9 – Capital Budgeting
9-25
Problem 9-28
a.
Cash Flow
Timing
Amount
14% PV
Factor
Present
Value
Equipment purchase
Year 0
($125,000)
1.0000
(125,000)
Salvage – old
Year 0
4,000
1.0000
4,000
Additional operating
expensesa
Years 1-10
(2,000)
5.2161
(10,432)
Additional contribution
marginb
Years 1-10
25,000
5.2161
130,403
Overhaul avoided
Year 3
15,000
.6750
10,125
Salvage – new
Year 10
9,000
.2697
2,427
Net present value
$ 11,523
10,000
Year
Cash inflow
Cumulative Cash inflow
1
$23,000
$23,000
2
$23,000
$46,000
3
$38,000a
$84,000
4
$23,000
$107,000
5
$23,000
$130,000
a$23,000 + $15,000
$23,000
$121,000
payback
9-26
Problem 9-29
a.
Cash Flow
Timing
Amount
14% PV
Factor
Present
Value
Equipment purchase
Year 0
($48,720)
1.0000
($48,720)
Salvage – old
Year 0
2,160
1.0000
2,160
Operating savingsa
Years 1-11
10,000
5.4527
54,527
Net present value
$7,967
b.
$10,000
$2,160–$48,720
= 4.6560
return is 18%.
c.
$10,000
$2,160–$48,720
= 4.656 years
d.
$2,160–$48,720
years11
$48,720
–$10,000
=
560,46$
571,5$
= 12%
machine.