Question - Net Present Value Method
The management of Kunkel Company is considering the purchase of a $40,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's eight-year useful life, it will have zero scrap value. The company's required rate of return is 12%. (Ignore income taxes.)
Requirement 1: Determine the net present value of the investment in the machine.
Requirement 2: What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
Question - Internal Rate of Return
Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. (Ignore income taxes.)
Requirement 1: What would be the total annual cash inflows associated with the new machine for capital budgeting purposes?
Requirement 2: Find the internal rate of return promised by the new machine.
Requirement 3: In addition to the data given previously, assume that the machine will have a $9,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return.
Question - Preference Ranking
Information on four investment proposals is given below:
| |
Investment Proposal
|
| |
A
|
B
|
C
|
D
|
|
Investment required
|
$(90,000)
|
$(100,000)
|
$(70,000)
|
$(120,000)
|
|
Present value of cash inflows
|
126,000
|
138,000
|
105,000
|
160,000
|
|
Net present value
|
$36,000
|
$38,000
|
$35,000
|
$40,000
|
|
Life of the project
|
5 years
|
7 years
|
6 years
|
6 years
|
Requirement 1: Compute the project profitability index for each investment proposal.
Requirement 2: Rank the proposals in terms of preference.
D C B A
C A B D
A B C D
B C A D
Question - Payback Method
The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
|
Year
|
Investment
|
Cash
Inflow
|
|
1
|
$15,000
|
$1,000
|
|
2
|
$8,000
|
$2,000
|
|
3
|
|
$2,500
|
|
4
|
|
$4,000
|
|
5
|
|
$5,000
|
|
6
|
|
$6,000
|
|
7
|
|
$5,000
|
|
8
|
|
$4,000
|
|
9
|
|
$3,000
|
|
10
|
|
$2,000
|
Requirement 1: Determine the payback period of the investment.
Requirement 2: Would the payback period be affected if the cash inflow in the last year were several times as large?
Yes
No
Question - Simple Rate of Return Method
The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $40,000. The new machine would have a useful life of 10 years with no salvage value.
Required: Compute the simple rate of return on the new automated bottling machine.