Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
PROBLEM 16-44 (40 MINUTES)
1. Net present-value analysis:
Old machine:
Annual costs:
Variable 300,000 $.38 ................................................................
$(114,000
)
Fixed ................................................................................................
(21,000
)
New machine:
Annual costs:
Variable 300,000 $.29 ................................................................
$(87,000
)
PROBLEM 16-44 (CONTINUED)
2.
Memorandum
Date:
Today
To:
President, Special People Industries
From:
I.M. Student
Subject:
Cookie machine replacement decision
The nonquantitative factors that are important to the decision include the following:
• The lower operating costs (variable and fixed) of the new machine would enable
Special People Industries to meet future competitive or inflationary pressures to
a greater degree than the old machine.
PROBLEM 16-45 (25 MINUTES)
1. Initial cost of investment in a longer runway:
Land acquisition ................................................................................................
$ (70,000
)
2. Annual net incremental benefit from runway:
Runway maintenance ................................................................................................
$ (28,000
)
3. Internal rate of return:
Annuity discount factor associated
with the internal rate of return
=
benefit lincrementa annual
investment ofcost initial
Find 6.710 in the 10-year row of Table IV of Appendix A. It falls in the 8 percent
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-46 (45 MINUTES)
1. Net present-value analysis:
Runway maintenance ................................................................................................
$ (28,000
)
Incremental revenue from landing fees ................................................................
40,000
2. From a purely economic perspective, the board should not approve the runway,
3. (a) Data that are likely to be most uncertain include the following:
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-46 (CONTINUED)
(b) The least uncertain data would likely include the following:
• Cost of acquiring land
PROBLEM 16-47 (30 MINUTES)
Annuity discount factor associated
with the internal rate of return
=
benefit lincrementa annual
investment ofcost initial
For the internal rate of return to be 12 percent, the annuity discount factor must be 5.650
(Table IV in Appendix A: r = .12, n = 10). Therefore:
PROBLEM 16-47 (CONTINUED)
We calculate the required increase in annual tax revenue as follows:
Required incremental benefit ................................................................
$ 76,007
Add: Annual costs to cover:
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-48 (45 MINUTES)
Storage Racks
Forklift
Year
MACRS
Depreciation
Cash Flow:
Tax Savings
(Depr. .35)
Present
Value*
MACRS
Depreciation
Cash Flow:
Tax Savings
(Depr. .35)
Present
Value*
Discount
Factor
1
$200,000 10.00% = $20,000
$ 7,000
$ 6,139
$120,000 20.00% = $24,000
$ 8,400
$ 7,367
.877
2
200,000 18.00% = 36,000
12,600
9,689
120,000 32.00% = 38,400
13,440
10,335
.769
PROBLEM 16-49 (40 MINUTES)
1. MicroTest Technology, Inc. should not purchase the new pump because the net
present value is a negative amount, $(70,547), as calculated in the following table:
20x2
20x3
20x4
20x5
20x6
Equipment cost .......................
$(608,000
)
Sale of old pump
[$50,000 (1 – .4)] ................
30,000
Depreciation tax shield* .........
$ 82,658
$110,236
$ 36,729
$ 18,377
Annual savings† .......................
75,000
75,000
75,000
75,000
PROBLEM 16-49 (CONTINUED)
Explanatory notes:
*20x3: $620,000 33.33% .4 = $82,658
20x4: $620,000 44.45% .4 = $110,236
2. Factors other than the net present value that management should consider before
making the pump replacement decision include the following:
• Availability of any necessary financing
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-50 (45 MINUTES)
1. Net-present-value analysis:
(a) Cost savings from manufacturing pressure fittings:
Per
Unit
Total
Cost to purchase pressure fittings from outside supplier ............................
$20.00
$1,600,000
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-50 (CONTINUED)
(b) Discounted-cash-flow analysis:
Cash
Flow
Discount
Factor
Present
Value
Annual cost savings
$561,600
3.605
$2,024,568
MACRS depreciation tax shield:
Year
MACRS
Percentage
MACRS
Depreciation
Tax
Rate
Tax
Shield
1
33.33%
$ 833,250
40%
$333,300
.893
297,637
Salvage Value of Tools
Cash
Flow
Cash proceeds
from sale
$100,000
.567
56,700
2. Factors that LifeLine Corporation’s management should consider in addition to the
discounted-cash-flow analysis before a decision is made to replace the tools or
purchase the pressure fittings from an outside supplier include:
• the possibility of negotiating a lower price for the pressure fittings.
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-51 (45 MINUTES)
1. Net-present value analysis of the machine replacement:
20x1
20x2
20x3
20x4
20x5
Depreciation tax shield:
Year
Acquisition
Cost
MACRS
Percentage
Tax
Rate
20x2:
$1,000,000
33.33%
.40
................................
133,320
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-51 (CONTINUED)
2. The machine replacement’s internal rate of return is between 6% and 8%. The
project’s net present value is positive if a 6% discount rate is used, but it is negative
if an 8% discount rate is used.
Year
Total After-Tax
Cash Flow
(from
requirement 1)
6%
Discount
Factor
Present
Value
(using 6%)
8%
Discount
Factor
Present
Value
(using 8%)
20x1 .................
$(964,000
)
1.000
$(964,000
)
1.000
$(964,000
)
3. The payback period on the machine replacement is between three and four years.
Year
Total After-Tax
Cash Inflow
(from requirement 1)
20x2 .........................................
$ 313,320
20x3 .........................................
357,800
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-51 (CONTINUED)
4. With a salvage value of zero on the new machine, the machine replacement’s net
present value is $(95,368). Thus, the after-tax discounted cash flow from the salvage
X – .40X
=
$149,950
Chapter 16 - Capital Expenditure Decisions
PROBLEM 16-52 (35 MINUTES)
1. (a) Mall restaurant:
Net after-tax cash inflows ................................................................................
$ 50,000
(b) Downtown restaurant:
Net after-tax cash inflows ................................................................................
$ 35,800
2. Profitability index =
investment initial
investment initial of exclusive flows, cash of valuepresent
(a) Mall restaurant:
4. The two proposed restaurant projects have different lives, which makes it
