Chapter 12: Using Excel to Make Decisions at Current Designs Part 1 (a), (b), (c)
Data
Required rate of return 9%
Cost of new rotomold oven 256,000$
Salvage value of new rotomold oven –$
Estimated useful life 8 years
Projected annual results for the project:
Sales 220,000$
Less:
Manufacturing costs 140,000$
Depreciation 32,000
Shipping and administrative costs 22,000 194,000
Income before income taxes 26,000
Income tax expense 10,800
Net income 15,200$
Required
Follow the step-by-step directions to evaluate capital budgeting decisions for Current Designs.
(c)
Event
Time
Period Cash Flows
Discount
Factor
Present
Value
Net annual cash flow 1-8 47,200$ 5.53482 261,244$
Part 1 responses
Part 1 c
The net present value indicates that the purchase of the rotomold oven is expected to
generate a cash return during each of the next 8 years that exceeds the minimum
Chapter 12: Using Excel to Make Decisions at Current Designs Part 1 (d)
Projected annual results for the project:
Sales 220,000$
Less:
Manufacturing costs 140,000$
Depreciation 32,000
Shipping and administrative costs 22,000 194,000
Income before income taxes 26,000
Income tax expense 10,800
Net income 15,200$
Required
Follow the step-by-step directions to evaluate capital budgeting decisions for Current Designs.
(a) Average investment $128,000
Annual rate of return 11.88%
(b) Net annual cash flow $47,200
Payback period 5.42 years
(d)
Event Time Period Cash Flows
Discount
Factor
Present
Value
NPV (44,198)$
IRR 9.55%
Part 1 responses
Part 1 d
The IRR indicates the return that the investment is expected to generate over each of the
Chapter 12: Using Excel to Make Decisions at Current Designs Part 2 (a)
Data
Less:
Manufacturing costs 140,000$
Depreciation 32,000
Shipping and administrative costs 22,000 194,000
Income before income taxes 26,000
Required
Follow the step-by-step directions to evaluate capital budgeting decisions for Current Designs.
(a) Average investment $128,000
Annual rate of return 11.88%
(b) Net annual cash flow $47,200
Payback period 5.42 years
Event Time Period Cash Flows
Discount
Factor
Present
Value
Oven purchase (256,000)
Total (256,000)$ 47,200$ 47,200$ 47,200$ 47,200$ 47,200$ 47,200$ 47,200$ 47,200$
NPV (4,191)$
IRR 9.55%
Part 2 responses
Part 2 a
The change in the discount rate caused no change in the IRR because the required rate of
return is not used in its computation. Regardless of the rate of return chosen by
Chapter 12: Using Excel to Make Decisions at Current Designs Part 2 (b)
Data
Required rate of return 15%
Projected annual results for the project:
Sales 220,000$
Less:
Required
Follow the step-by-step directions to evaluate capital budgeting decisions for Current Designs.
(a) Average investment $104,000
Annual rate of return 20.00%
(b) Net annual cash flow $46,800
Payback period 4.44 years
Event
Time
Period Cash Flows
Discount
Factor
Present
Value
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Annual cash flow 46,800$ 46,800$ 46,800$ 46,800$ 46,800$ 46,800$ 46,800$ 46,800$
Oven purchase (208,000)
Part 2 responses
Part 2 b
The NPV improved from negative $4,191 (in part 2(a)) to $2,007. The NPV indicates that
the investment is acceptable as it generates an annual cash return that exceeds the