Almendarez Corporation is considering the purchase of a machine that would cost

Almendarez Corporation is considering the purchase of a machine that would cost $320,000 and would last for 7 years. At the end of 7 years, the machine would have a salvage value of $51,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $72,000. The company requires a minimum pretax return of 18% on all investment projects.

    101. The present value of the annual cost savings of $72,000 is closest to:

            A)      $22,608

            B)      $874,298

            C)      $504,000

            D)      $274,464

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

           

	Year(s)	Amount	18% Factor	PV
Annual cost savings...........	1-7	$72,000	3.812	$274,464

    102. The net present value of the proposed project is closest to:

            A)      -$29,522

            B)      -$45,536

            C)      $5,464

            D)      -$94,042

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

           

	Year(s)	Amount	18% Factor	PV
Initial investment...............	Now	($320,000)	1.000	($320,000)
Annual cost savings...........	1-7	$72,000	3.812	274,464
Salvage value.....................	7	$51,000	0.314	16,014
Net present value...............				($  29,522)

Use the following to answer questions 103-104:

(Ignore income taxes in this problem.) The management of Opray Corporation is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects.

    103. The present value of the annual cost savings of $78,000 is closest to:

            A)      $763,064

            B)      $177,027

            C)      $546,000

            D)      $367,536

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

           

	Year(s)	Amount	11% Factor	PV
Annual labor savings.........	1-7	$78,000	4.712	$367,536

    104. The net present value of the proposed project is closest to:

            A)      $15,646

            B)      $89,588

            C)      $7,536

            D)      $186,000

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

           

	Year(s)	Amount	11% Factor	PV
Initial investment...............	Now	($360,000)	1.000	($360,000)
Annual net cash receipts....	1-7	$78,000	4.712	367,536
Net present value...............				$    7,536

Use the following to answer questions 105-106:

(Ignore income taxes in this problem.) Paragas, Inc., is considering the purchase of a machine that would cost $370,000 and would last for 8 years. At the end of 8 years, the machine would have a salvage value of $52,000. The machine would reduce labor and other costs by $96,000 per year. Additional working capital of $4,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 19% on all investment projects.

    105. The combined present value of the working capital needed at the beginning of the project and the working capital released at the end of the project is closest to:

            A)      -$3,004

            B)      $0

            C)      -$12,080

            D)      $11,816

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

           

	Year(s)	Amount	19% Factor	PV
Working capital required...	Now	($4,000)	1.000	($4,000)
Working capital released...	8	$4,000	0.249	996
Net present value...............				($3,004)

    106. The net present value of the proposed project is closest to:

            A)      $9,584

            B)      $78,530

            C)      $22,532

            D)      $19,528

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Easy

            Solution:

           

	Year(s)	Amount	19% Factor	PV
Initial investment...............	Now	($370,000)	1.000	($370,000)
Annual labor savings.........	1-8	$96,000	3.954	379,584
Working capital required...	Now	($4,000)	1.000	(4,000)
Working capital released...	8	$4,000	0.249	996
Salvage value.....................	8	$52,000	0.249	12,950
Net present value...............				$  19,530

Use the following to answer questions 107-108:

(Ignore income taxes in this problem.) Undersymington Company has an opportunity to invest in a machine that would cost $28,000, and that would produce cost savings of $8,000 each year for the next five years.

    107. If the machine has zero salvage value, then the internal rate of return is closest to:

            A)      10.4%

            B)      10.9%

            C)      12.8%

            D)      13.2%

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  2     Level:  Medium

            Solution:

            Factor of the internal rate of return

            = Investment required ÷ Net annual cash inflow = $28,000 ÷ $8,000 = 3.500.

            The factor of 3.500 for 5 years represents an internal rate of return of somewhat more than 13%, or 13.2%.

    108. If the machine's salvage value at the end of the project is $4,000, then the internal rate of return is:

            A)      less than 11%

            B)      less than 12%, but greater than 11%

            C)      less than 13%, but greater than 12%

            D)      greater than 13%

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  2     Level:  Hard

            Solution:

            Factor of the internal rate of return without considering salvage value

            = Investment required ÷ Net annual cash inflow = $28,000 ÷ $8,000 = 3.500.

            The factor of 3.500 for 5 years represents an internal rate of return of somewhat more than 13%, or 13.2%.

           

            Since the IRR is more than 13% without considering the salvage value, adding in the present value of the salvage value will further increase the IRR.

Thanks