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25 Minutes, Medium PROBLEM 26.4
MARENGO
a.
(1)
(3) Net present value, discounted at 15%:
Total present value of 10 annual net cash flows ($80,000 × 5.019) 401,520$
(1)
(3) Net present value, discounted at 15%:
Total present value of 10 annual net cash flows ($95,000 × 5.019) 476,805$
Present value of salvage value due in 10 years ($50,000 × .247) 12,350
b.
Based upon the above analysis, Proposal A is the only acceptable investment of the two
proposals under consideration. Both proposals have acceptable payback periods (less than
Proposal B
Payback period:
Proposal A
Payback period:
25 Minutes, Medium PROBLEM 26.5A
V.S. YOGURT
a.
(1)
(3) Net present value, discounted at 15%:
Total present value of seven annual net cash flows ($750,000 × 4.160) 3,120,000$
(1)
(3) Net present value, discounted at 15%:
Total present value of seven annual net cash flows ($570,000 × 4.160) 2,371,200$
Present value of salvage due in seven years ($400,000 × .376) 150,400
b.
Proposal A
Payback period:
Proposal B
Payback period:
Based on the above analysis, Proposal B is the only acceptable investment of the two
proposals under consideration. Although Proposal A has a slightly shorter payback period
30 Minutes, Strong
PROBLEM 26.6A
PATHWAYS APPLIANCE COMPANY
a.
Estimated sales (12,000 units @ $35) 420,000$
Less estimated incremental costs:
Variable manufacturing costs (12,000 units @ $15) 180,000$
b. Computation of annual net cash flow:
Cash receipts 420,000$
c. (1)
(2)
(3) Net present value of project, discounted at 15%:
Total present value of annual cash flows ($102,000 × 2.855) 291,210$
PATHWAYS APPLIANCE COMPANY
Schedule of Estimated Net Income
Payback period:
Return on average investment:
40 Minutes, Strong PROBLEM 26.7A
DOCTORS
a.
$1,250,000
$243,750
The supporting calculations for the above payback figure are:
Incremental annual revenue of investment 800,000$
b.
Return on average investment:
Payback period:
Amount to Be Invested
Estimated Annual Net Cash Flow
=
= 5.13 years
PROBLEM 26.7A
DOCTORS (concluded)
c. Net present value:
The discounted present value of the incremental annual cash flow of
the investment (see part a) discounted at 12% for 8 years is
$243,750 × 4.968 (from Exhibit 26.4) 1,210,950$
return is only slightly greater than 12%.
d.
Nonfinancial factors that the doctors should consider include (1) the pace at which MRI
50 Minutes, Strong PROBLEM 26.8A
JEFFERSON MOUNTAIN
a.
The supporting calculations are:
Incremental annual revenue of investment 40,000$
The supporting calculations for the payback period figure are:
Incremental annual revenue of investment 54,000$
Chairlift
Payback period:
Snow-Making Equipment
PROBLEM 26.8A
JEFFERSON MOUNTAIN (continued)
b.
c. Net present value:
Snow-Making Equipment
The discounted present value of the incremental annual cash flow of
Return on average investment:
Snow-Making Equipment
Thus, the return on average investment is:
Chairlift
PROBLEM 26.8A
JEFFERSON MOUNTAIN (concluded)
d.
e.
The management of Jefferson Mountain must decide which investment opportunity will
best serve its customers. Thus, it must try to determine if adequate snow coverage with long
lift lines is better than short lift lines with limited snow coverage. A marketing study could
It is likely that management will elect to invest in snow-making equipment. This investment
has the shortest payback period, a greater return on average investment, and a higher net
45 Minutes, Strong PROBLEM 26.9A
SONIC, INC.
a.
The supporting calculations for the above payback figure are:
Incremental annual revenue of investment 300,000$
The supporting calculations for the payback figure are:
Incremental annual revenue of investment 160,000$
Payback period:
Computer Chip Equipment
Software Bank Installation
*Depreciation expense: $300,000 ÷ 6 years = $50,000
PROBLEM 26.9A
SONIC, INC. (continued)
b.
c. Net present value:
Computer Chip Equipment
The discounted present value of the incremental annual cash flow of
Thus, the return on average investment is:
Thus, the return on average investment is:
Return on average investment:
Computer Chip Equipment
PROBLEM 26.9A
SONIC, INC. (concluded)
d.
e.
f.
There are several nonfinancial considerations worth mentioning. First, the company must
try to determine which medium the customers are most likely to use. Second, it must try to
determine future industry trends regarding software distribution. Third, it must evaluate
If Sonic invests in the software bank, there will no longer be a need for employees to load
It is likely that management will elect to invest in the computer chip. In addition to being an
SOLUTIONS TO PROBLEMS SET B
30 Minutes, Strong PROBLEM 26.1B
MONSTER TOYS
a.
Estimated sales (100,000 units @ $8) 800,000$
Less estimated incremental costs:
Variable manufacturing costs (100,000 units @ $3.00) 300,000$
b. Computation of annual net cash flow:
Cash receipts 800,000$
c. (1)
(2)
(3) Net present value of project, discounted at 12%:
Total present value of annual net cash flows ($319,000 × 2.402) 766,238$
Return on average investment:
MONSTER TOYS
Schedule of Estimated Net Income
Payback period:
PROBLEM 26.2B
VIRGINIA TECHNOLOGY
a.
(1)
(3) Net present value, discounted at 15%:
(1)
(3) Net present value, discounted at 15%:
Total present value of eight annual net cash flows ($135,000 × 4.487) 605,745$
Present value of salvage value due in eight years ($120,000 × .327) 39,240
b.
From the information above, Proposal A clearly appears to be the better investment.
Payback period:
25 Minutes, Medium
Proposal B
Proposal A
Payback period:
25 Minutes, Medium
PROBLEM 26.3B
JASON EQUIPMENT CO.
a.
(1)
(3) Net present value, discounted at 15%:
Total present value of six annual net cash flows ($140,000 × 3.784) 529,760$
(1)
(3) Net present value, discounted at 15%:
b.
From the information above, Proposal B appears to be the better investment. It has a
Proposal A
Payback period:
Proposal B
Payback period:
25 Minutes, Medium PROBLEM 26.4B
SAMBA
a.
(1)
(3) Net present value, discounted at 10%:
Total present value of 10 annual net cash flows ($75,000 × 6.145) 460,875$
(1)
(3) Net present value, discounted at 10%:
Total present value of 10 annual net cash flows ($70,000 × 6.145) 430,150$
Present value of salvage value due in 10 years ($40,000 × .386) 15,440
b.
Proposal A
Payback period:
Based upon the above analysis, Proposal A is the best investment of the two proposals
under consideration. Both proposals have acceptable payback periods (less than the useful
Proposal B
Payback period:
