501
E15–13
a. Annual net cash flows by machine:
Stitching Machine
Annual net cash flows (at the end of each of 8 years) ………………… $135,000
b. Present Value Index = Invested Be to Amount
Flows Cash Net of ValuePresent Total
c. The present value index indicates that the stitching machine would be the
502
E15–14
a. Average rate of return on investment: 1,700,000*
($10,000,000+$2,000,000)÷2 = 28.3%
E15–15
$2,375,000 = 4.75 years
b. Net present value:
Present value factor for an annuity of $1, 10 periods at 10%: 6.145
503
E15–15, Concluded
• The cost of the automated assembly equipment does not stop with the
E15–16
a. Present Value Factor for an
Annuity of $1 for 8 Periods =
A
mount to Be Invested
A
nnual Net Cash Flow
E15–17
Periods 10 for $1 of Annuity
an for Factor luePresent Va = Flows Cash Net Annual
Invested Be to Amount
504
E15–18
a. Delivery Truck
Cash received from additional deliveries (90,000 bags × $0.35) ….. $31,500
Bagging Machine
=
A
mount to Be Invested
A
nnual Net Cash Flows
b. To: Management
Re: Investment Recommendation
An internal rate of return analysis was performed for the delivery truck and
Present Value Factor for an
Annuity of $1 for 5 Periods
505
E15–19
a. Present value of annual net cash flows ($620,000 × 5.650*) ………… $ 3,503,000
E15–20
With an expected useful life of eight years, the cash payback period could not be
greater than eight years. This would indicate the cost of the initial investment
506
E15–21
Office Building
Present Value Net Cash Present Value of
Year of $1 at 15% Flows Net Cash Flows
1 0.870 $ 950,000 $ 826,500
Condominium Complex
Present Value Net Cash Present Value of
Year of $1 at 15% Flows Net Cash Flows
1 0.870 $ 1,200,000 $ 1,044,000
The net present value of both projects is positive; thus, both proposals are ac-
ceptable. However, the net present value of the condominium complex exceeds
507
E15–22
a.
Blending Equipment
Equal annual cash flows for Years 1–4 …………………………. $ 18,000
Computer System
Equal annual cash flows for Years 1–4 …………………………. $ 10,000
508
PROBLEMS
P15–1
1. a. Average annual rate of return for both projects:
b. Net present value analysis:
Present Value of
Net Cash Flows Net Cash Flows
Present Value of Distrib. Center Tracking Distrib. Center Tracking
Year $1 at 15% Expansion Technology Expansion Technology
1 0.870 $ 226,000 $ 360,000 $ 196,620 $ 313,200
2. The report to the capital investment committee can take many forms. The
report should, as a minimum, present the following points:
509
P15–2
1. a. Cash payback period for both products: 2 years (the year in which accu-
mulated net cash flows equal $400,000), shown as follows:
Canadian Cycling European Hiking
Net Cash Cumulative Net Cash Cumulative
Year Flows Net Cash Flows Year Flows Net Cash Flows
b. Net present value analysis:
Present Value of Present Value of
Net Cash Flows Net Cash Flows
Canadian European Canadian European
Year $1 at 10% Cycling Hiking Cycling Hiking
1 0.909 $220,000 $188,000 $199,980 $170,892
2. The report can take many forms and should include the following four points:
510
P15–3
1.
Product Line Expansion
Present Value Net Cash Present Value of
Year of $1 at 20% Flow Net Cash Flow
1 0.833 $ 4,200,000 $ 3,498,600
Distribution Facilities
Present Value Net Cash Present Value of
Year of $1 at 20% Flow Net Cash Flow
1 0.833 $1,000,000 $ 833,000
Computer Network
Present Value Net Cash Present Value of
Year of $1 at 20% Flow Net Cash Flow
1 0.833 $ 600,000 $ 499,800