Chipps
Corporation uses a discount rate of 9% in its capital budgeting. Management is
considering an investment in telecommunications equipment with a useful life of
5 years. Excluding the salvage value of the equipment, the net present value of
the investment in the equipment is -$530,985.
Required:
How large would the salvage value of
the telecommunications equipment have to be to make the investment in the telecommunications
equipment financially attractive?
Ans:
Minimum salvage value
= Negative net present value to the
offset ÷ Present value factor
= $530,985 ÷ 0.650 = $816,900
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
146. (Ignore
income taxes in this problem.) Choudhury Corporation is considering the
following three investment projects:
|
|
|
Project
H
|
Project
I
|
Project
J
|
|
|
Investment required.......................
|
$11,000
|
$53,000
|
$89,000
|
|
|
Present value of cash inflows........
|
$12,980
|
$61,480
|
$96,120
|
Required:
Rank the investment projects using
the project profitability index. Show your work
Ans:
|
|
Project
H
|
Project
I
|
Project
J
|
|
Investment required (a)........................
|
($11,000)
|
($53,000)
|
($89,000)
|
|
Present value of cash inflows...............
|
12,980
|
61,480
|
96,120
|
|
Net present value (b)............................
|
$ 1,980
|
$ 8,480
|
$ 7,120
|
|
Project profitability index (b) ÷ (a)......
|
0.18
|
0.16
|
0.08
|
|
Ranked by project profitability index..
|
1
|
2
|
3
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
147. (Ignore
income taxes in this problem.) The management of Winstead Corporation is
considering the following three investment projects:
|
|
|
Project
Q
|
Project
R
|
Project
S
|
|
|
Investment required.......................
|
$14,000
|
$48,000
|
$74,000
|
|
|
Present value of cash inflows........
|
$14,140
|
$54,720
|
$82,140
|
The only cash outflows are the
initial investments in the projects.
Required:
Rank the investment projects using
the project profitability index. Show your work
Ans:
|
|
Project
Q
|
Project
R
|
Project
S
|
|
Investment required (a)........................
|
($14,000)
|
($48,000)
|
($74,000)
|
|
Present value of cash inflows...............
|
14,140
|
54,720
|
82,140
|
|
Net present value (b)............................
|
$ 140
|
$ 6,720
|
$ 8,140
|
|
Project profitability index (b) ÷ (a)......
|
0.01
|
0.14
|
0.11
|
|
Ranked by project profitability index..
|
3
|
1
|
2
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
148. (Ignore
income taxes in this problem.) Hady Company is considering purchasing a machine
that would cost $688,800 and have a useful life of 7 years. The machine would
reduce cash operating costs by $118,759 per year. The machine would have no
salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
Ans:
a.
Payback period = Investment
required ÷ Net annual cash flow
= $688,800 ÷ $118,759 = 5.80 years
b.
The simple rate of return
is computed as follows:
|
|
Cost of machine, net of salvage value (a).......
|
$688,800
|
|
|
Useful life (b)..................................................
|
7
years
|
|
|
Annual depreciation (a) ÷ (b)..........................
|
$98,400
|
|
|
|
|
|
|
Annual cost savings.........................................
|
$118,759
|
|
|
Less annual depreciation.................................
|
98,400
|
|
|
Annual incremental net operating income......
|
$ 20,359
|
Simple rate of return = Annual
incremental net operating income ÷ Initial investment = $20,359 ÷ $688,800 =
2.96%
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5,6 Level: Easy
149. (Ignore
income taxes in this problem.) Ramson Company is considering purchasing a
machine that would cost $756,000 and have a useful life of 8 years. The machine
would reduce cash operating costs by $132,632 per year. The machine would have
a salvage value of $151,200 at the end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.
Ans:
a.
Payback period = Investment
required ÷ Net annual cash flow
= $756,000 ÷ $132,632 = 5.70 years
In this case the salvage value
plays no part in the payback period since all of the investment is recovered
before the end of the project.
b.
The simple rate of return
is computed as follows:
|
|
Cost of machine, net of salvage value (a)..........
|
$604,800
|
|
|
Useful life (b).....................................................
|
8
years
|
|
|
Annual depreciation (a) ÷ (b).............................
|
$75,600
|
|
|
|
|
|
|
Annual cost savings............................................
|
$132,632
|
|
|
Less annual depreciation....................................
|
75,600
|
|
|
Annual incremental net operating income.........
|
$ 57,032
|
Simple rate of return = Annual
incremental net operating income ÷ Initial investment = $57,032 ÷ $756,000 =
7.54%
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5,6 Level: Medium
150. (Ignore
income taxes in this problem.) Ostermeyer Corporation is considering a project
that would require an initial investment of $247,000 and would last for 7
years. The incremental annual revenues and expenses for each of the 7 years
would be as follows:
|
|
Sales...................................
|
$198,000
|
|
|
Variable expenses..............
|
46,000
|
|
|
Contribution margin..........
|
152,000
|
|
|
Fixed expenses:
|
|
|
|
Salaries...........................
|
22,000
|
|
|
Rents...............................
|
32,000
|
|
|
Depreciation...................
|
33,000
|
|
|
Total fixed expenses..........
|
87,000
|
|
|
Net operating income........
|
$ 65,000
|
At the end of the project, the scrap
value of the project's assets would be $16,000.
Required:
Determine the payback period of the
project. Show your work!
Ans:
|
Net operating income................................
|
$65,000
|
|
Add noncash deduction for depreciation...
|
33,000
|
|
Net annual cash inflow..............................
|
$98,000
|
|
|
|
Payback period = Investment required
÷ Net annual cash inflow
= $247,000 ÷ $98,000 = 2.52 years
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
151. (Ignore
income taxes in this problem.) The management of Truelove Corporation is
considering a project that would require an initial investment of $321,000 and
would last for 7 years. The annual net operating income from the project would
be $28,000, including depreciation of $42,000. At the end of the project, the
scrap value of the project's assets would be $27,000.
Required:
Determine the payback period of the
project. Show your work!
Ans:
|
Net operating income................................
|
$28,000
|
|
Add noncash deduction for depreciation...
|
42,000
|
|
Net annual cash inflow..............................
|
$70,000
|
|
|
|
Payback period = Investment required
÷ Net annual cash inflow
= $321,000 ÷ $70,000 = 4.59 years
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
152. (Ignore
income taxes in this problem.) Ducey Corporation is contemplating purchasing
equipment that would increase sales revenues by $79,000 per year and cash
operating expenses by $27,000 per year. The equipment would cost $150,000 and
have a 6 year life with no salvage value. The annual depreciation would be
$25,000.
Required:
Determine the simple rate of return
on the investment to the nearest tenth of a percent. Show your work!
Ans:
Simple rate of return = Annual incremental
net operating income ÷ Initial investment
= [Incremental revenues − (Cash
operating expenses + Depreciation)] ÷ Initial investment
=79,000 − ($27,000 + $25,000) ÷
$150,000
= 27,000 ÷ $150,000 = 18.0%
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
153. (Ignore
income taxes in this problem.) The management of Nixon Corporation is
investigating purchasing equipment that would cost $518,000 and have a 7 year
life with no salvage value. The equipment would allow an expansion of capacity
that would increase sales revenues by $364,000 per year and cash operating
expenses by $211,000 per year.
Required:
Determine the simple rate of return
on the investment to the nearest tenth of a percent. Show your work!
Ans:
Simple rate of return = Annual
incremental net operating income ÷ Initial investment
= [Incremental revenues − (Cash
operating expenses + Depreciation)] ÷ Initial investment
= 364,000 − ($211,000 + $74,000) ÷
$518,000
= 79,000 ÷ $518,000 = 15.3%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
154. (Ignore
income taxes in this problem.) Russnak Corporation is investigating automating
a process by purchasing a new machine for $198,000 that would have a 9 year
useful life and no salvage value. By automating the process, the company would
save $68,000 per year in cash operating costs. The company's current equipment
would be sold for scrap now, yielding $18,000. The annual depreciation on the
new machine would be $22,000.
Required:
Determine the simple rate of return
on the investment to the nearest tenth of a percent. Show your work!
Ans:
Simple rate of return = Annual
incremental net operating income ÷ Initial investment
= (Cost savings - Depreciation) ÷
Initial investment
= ($68,000 − $22,000) ÷ ($198,000 −
$18,000)
= $46,000 ÷ $180,000 = 25.6%
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
155. (Ignore
income taxes in this problem.) The management of Schenk Corporation is
investigating automating a process by replacing old equipment by a new machine.
The old equipment would be sold for scrap now for $13,000. The new machine
would cost $648,000, would have a 9 year useful life, and would have no salvage
value. By automating the process, the company would save $186,000 per year in
cash operating costs.
Required:
Determine the simple rate of return
on the investment to the nearest tenth of a percent. Show your work!
Ans:
Depreciation on the new machine =
$648,000 ÷ 9 = $72,000
Simple rate of return = Annual
incremental net operating income ÷ Initial investment
= (Cost savings − Depreciation) ÷
Initial investment
= ($186,000 − $72,000) ÷ ($648,000 -
$13,000)
= $114,000 ÷ $635,000 = 18.0%
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
156. A
company is considering purchasing an asset for $70,000 that would have a useful
life of 5 years and would have a salvage value of $12,000. For tax purposes, the
entire original cost of the asset would be depreciated over 5 years using the
straight-line method and the salvage value would be ignored. The asset would
generate annual net cash inflows of $22,000 throughout its useful life. The
project would require additional working capital of $8,000, which would be
released at the end of the project. The company's tax rate is 40% and its
discount rate is 9%.
Required:
What is the net present value of the
asset?
Ans:
|
|
Years
|
Amount
|
Tax
Effect
|
|
Cost of asset.......................
|
Now
|
($70,000)
|
|
|
Working capital needed......
|
Now
|
($8,000)
|
|
|
Net annual cash inflows.....
|
1-5
|
$22,000
|
0.60
|
|
Depreciation tax shield.......
|
1-5
|
$14,000
|
0.40
|
|
Salvage value.....................
|
5
|
$12,000
|
0.60
|
|
Working capital released....
|
5
|
$8,000
|
|
|
Net present value................
|
|
|
|
|
|
After-Tax
Cash Flows
|
9%
Factor
|
Present
Value
|
|
Cost of asset.......................
|
($70,000)
|
1.000
|
($70,000)
|
|
Working capital needed......
|
($8,000)
|
1.000
|
(8,000)
|
|
Net annual cash inflows.....
|
$13,200
|
3.890
|
51,348
|
|
Depreciation tax shield.......
|
$5,600
|
3.890
|
21,784
|
|
Salvage value.....................
|
$7,200
|
0.650
|
4,680
|
|
Working capital released....
|
$8,000
|
0.650
|
5,200
|
|
Net present value................
|
|
|
$ 5,012
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium
157. Management
is considering purchasing an asset for $40,000 that would have a useful life of
8 years and no salvage value. For tax purposes, the entire original cost of the
asset would be depreciated over 8 years using the straight-line method. The
asset would generate annual net cash inflows of $20,000 throughout its useful
life. The project would require additional working capital of $5,000, which
would be released at the end of the project. The company's tax rate is 40% and
its discount rate is 12%.
Required:
What is the net present value of the
asset?
Ans:
|
|
Years
|
Amount
|
Tax
Effect
|
|
Cost of asset........................
|
Now
|
($40,000)
|
|
|
Working capital needed......
|
Now
|
($5,000)
|
|
|
Net annual cash inflows.....
|
1-8
|
$20,000
|
0.60
|
|
Depreciation tax shield.......
|
1-8
|
$5,000
|
0.40
|
|
Working capital released....
|
8
|
$5,000
|
|
|
Net present value................
|
|
|
|
|
|
After-Tax
Cash Flows
|
12%Factor
|
Present
Value
|
|
Cost of asset........................
|
($40,000)
|
1.000
|
($40,000)
|
|
Working capital needed......
|
($5,000)
|
1.000
|
(5,000)
|
|
Net annual cash inflows.....
|
$12,000
|
4.968
|
59,616
|
|
Depreciation tax shield.......
|
$2,000
|
4.968
|
9,936
|
|
Working capital released....
|
$5,000
|
0.404
|
2,020
|
|
Net present value................
|
|
|
$26,572
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium
158. Belling
Inc. has provided the following data concerning a proposed investment project:
|
|
Initial investment...............
|
$168,000
|
|
|
Annual cash receipts..........
|
$126,000
|
|
|
Life of the project..............
|
9
years
|
|
|
Annual cash expenses........
|
$50,000
|
|
|
Salvage value.....................
|
$8,000
|
The company's tax rate is 30%. For
tax purposes, the entire initial investment without any reduction for salvage
value will be depreciated over 7 years. The company uses a discount rate of
14%.
Required:
Compute the net present value of the
project.
Ans:
|
Annual cash receipts.......................................
|
$126,000
|
|
Annual cash expenses.....................................
|
50,000
|
|
Annual net cash receipts..................................
|
$ 76,000
|
|
|
|
|
Initial investment (a).......................................
|
$168,000
|
|
Tax life (b).......................................................
|
7
years
|
|
Annual depreciation deduction (a) ÷ (b).........
|
$24,000
|
|
|
Year(s)
|
Amount
|
Tax
Effect
|
After-Tax
Cash Flows
|
|
Initial investment...........................
|
Now
|
($168,000)
|
|
($168,000)
|
|
Annual net cash receipts................
|
1-9
|
$76,000
|
0.70
|
$53,200
|
|
Salvage value................................
|
9
|
$8,000
|
0.70
|
$5,600
|
|
Annual depreciation deductions....
|
1-7
|
$24,000
|
0.30
|
$7,200
|
|
|
After-Tax
Cash Flows
|
14%
Factor
|
PV
|
|
Initial investment..........................
|
($168,000)
|
1.000
|
($168,000)
|
|
Annual net cash receipts...............
|
$53,200
|
4.946
|
263,127
|
|
Salvage value................................
|
$5,600
|
0.308
|
1,725
|
|
Annual depreciation deductions...
|
$7,200
|
4.288
|
30,874
|
|
Net present value..........................
|
|
|
$127,726
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium
159. Camel
Inc. is considering a project that would require an initial investment of
$210,000 and would have a useful life of 6 years. The annual cash receipts
would be $126,000 and the annual cash expenses would be $57,000. The salvage
value of the assets used in the project would be $32,000. The company's tax
rate is 30%. For tax purposes, the entire initial investment without any
reduction for salvage value will be depreciated over 5 years. The company uses
a discount rate of 10%.
Required:
Compute the net present value of the
project.
Ans:
|
Annual cash receipts.......................................
|
$126,000
|
|
Annual cash expenses.....................................
|
57,000
|
|
Annual net cash receipts..................................
|
$ 69,000
|
|
|
|
|
Initial investment (a).......................................
|
$210,000
|
|
Tax life (b).......................................................
|
5
years
|
|
Annual depreciation deduction (a) ÷ (b).........
|
$42,000
|
|
|
Year(s)
|
Amount
|
Tax
Effect
|
After-Tax
Cash Flows
|
|
Initial investment...........................
|
Now
|
($210,000)
|
|
($210,000)
|
|
Annual net cash receipts................
|
1-6
|
$69,000
|
0.70
|
$48,300
|
|
Salvage value................................
|
6
|
$32,000
|
0.70
|
$22,400
|
|
Annual depreciation deductions....
|
1-5
|
$42,000
|
0.30
|
$12,600
|
|
|
After-Tax
Cash Flows
|
10%
Factor
|
PV
|
|
Initial investment..........................
|
($210,000)
|
1.000
|
($210,000)
|
|
Annual net cash receipts...............
|
$48,300
|
4.355
|
210,347
|
|
Salvage value................................
|
$22,400
|
0.564
|
12,634
|
|
Annual depreciation deductions...
|
$12,600
|
3.791
|
47,767
|
|
Net present value..........................
|
|
|
$ 60,747
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 14C LO: 8 Level: Medium
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