Crowl Corporation is investigating automating a process by purchasing a machine for

62. (Ignore income taxes in this problem.) Crowl Corporation is investigating automating a process by purchasing a machine for $792,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $132,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,000. The annual depreciation on the new machine would be $88,000. The simple rate of return on the investment is closest to:

            A)      11.1%

            B)      16.7%

            C)      5.7%

            D)      5.6%

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  6     Level:  Easy

            Solution:

           

            The simple rate of return is computed as follows:

	Cost of machine, net of scrap (a) ($792,000 − $21,000).	$771,000
	Annual cost savings.........................................................	$132,000
	Less annual depreciation..................................................	88,000
	Annual incremental net operating income.......................	$  44,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment = $44,000 ÷ $771,000 = 5.7%

      63. (Ignore income taxes in this problem.) The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

            A)      18.1%

            B)      11.1%

            C)      28.4%

            D)      17.3%

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  6     Level:  Easy

            Solution:

          

            The simple rate of return is computed as follows:

	Cost of machine, net of salvage value (a)..........	$243,000
	Useful life (b).....................................................	9 years
	Annual depreciation (a) ÷ (b).............................	$27,000
	Annual cost savings............................................	$69,000
	Less annual depreciation....................................	27,000
	Annual incremental net operating income.........	$42,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment, less salvage value = $42,000 ÷ ($243,000 − $11,000) = 18.1%

      64. (Ignore income taxes in this problem.)     A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%?

            A)      $3,254.68

            B)      $3,539.82

            C)      $6,440.00

            D)      $7,720.00

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Easy

            Solution:

           

            Factor from Present Value of $1 table, 12%, 10 years: 0.322

$20,000 × 0.322 = $6,440.00

      65. (Ignore income taxes in this problem.) At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years?

            A)      $383,436

            B)      $540,000

            C)      $740,741

            D)      $1,043,200

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Easy

            Solution:

           

            Factor from Present Value of $1 table, 14%, 10 years: 0.270

$2,000,000 × 0.270 = $540,000

      66. (Ignore income taxes in this problem.) How much would you have to invest today in the bank at an interest rate of 8% to have an annuity of $4,800 per year for 7 years, with nothing left in the bank at the end of the 7 years? Select the amount below that is closest to your answer.

            A)      $33,600

            B)      $2,798

            C)      $24,989

            D)      $31,111

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Easy

            Solution:

           

            Factor from Present Value of an Annuity of $1 in Arrears Table, 8%, 7 years: 5.206

$4,800 × 5.206 = $24,989

      67. (Ignore income taxes in this problem.) You have deposited $24,764 in a special account that has a guaranteed interest rate. If you withdraw $4,300 at the end of each year for 9 years, you will completely exhaust the balance in the account. The guaranteed interest rate is closest to:

            A)      6%

            B)      10%

            C)      17%

            D)      56%

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Hard

            Solution:

           

            $4,300 × Factor from PV of Annuity table = $24,764

Factor from PV of Annuity table = 5.759

Looking in Present Value of an Annuity of $1 in Arrears in the 9^th row, 5.759 is found in the 10% column which is the guaranteed interest rate.

      68. (Ignore income taxes in this problem.) You have deposited $7,620 in a special account that has a guaranteed interest rate of 19% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 7 years? Select the amount below that is closest to your answer.

            A)      $1,295

            B)      $2,056

            C)      $2,219

            D)      $1,089

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Medium

            Solution:

            Factor from Present Value of an Annuity of $1 in Arrears table, 19%, 7 years: 3.706

            $7,620 ÷ 3.706 = $2,056

      69. (Ignore income taxes in this problem.) Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. What is the present value of the lease payments if the discount rate is 5%?

            A)      $12,528

            B)      $14,103

            C)      $14,808

            D)      $11,050

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Easy

            Solution:

           

            Factor from Present Value of an Annuity of $1 in Arrears table, 5%, 6 years: 5.076

$2,468 × 5.076 = $12,528

      70. (Ignore income taxes in this problem.) Domebo Corporation has entered into a 7 year lease for a piece of equipment. The annual payment under the lease will be $3,400, with payments being made at the beginning of each year. If the discount rate is 14%, the present value of the lease payments is closest to:

            A)      $9,511

            B)      $16,623

            C)      $20,877

            D)      $23,800

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Hard

            Solution:

            Annual payments made at the beginning of the year mean that the first lease payment would be paid immediately; the present value of the first lease payment is therefore $3,400. The next six lease payments for years 2-7 made at the beginning of each year is equivalent to six payments at the end of each year for years 1 through 6. The table for the Present Value of an Annuity of $1 in Arrears can be used to calculate the years 1-6.

           

            Factor from Present Value of an Annuity of $1 in Arrears table, 14%, 6 years: 3.889

($3,400 × 3.889) + $3,400 = $16,623

      71. Wedge Corporation uses a discount rate of 14% and has a tax rate of 30%. The following cash flows occur in the last year of a 10-year equipment selection investment project:

           

	Cost savings for the year...........................	$180,000
	Working capital released...........................	$120,000
	Salvage value from sale of equipment......	$25,000

            At the end of the ten years when the equipment is sold, its net book value for tax purposes is zero. The total after-tax present value of the cash flows above is closest to:

            A)      $45,765

            B)      $48,465

            C)      $61,425

            D)      $71,145

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Medium

            Solution:

	Years	Amount	Tax Effect
Net cash inflow..................	10	$180,000	0.70
Salvage value.....................	10	$25,000	0.70
Working capital released....	10	$120,000
Net present value................

	After-Tax Cash Flows	14% Factor	Present Value
Net annual cash inflow.......	$126,000	0.270	$34,020
Salvage value.....................	$17,500	0.270	4,725
Working capital released....	$120,000	0.270	32,400
Net present value................			$71,145

      72. A company anticipates a taxable cash receipt of $80,000 in year 3 of a project. The company's tax rate is 30% and its discount rate is 10%. The present value of this future cash flow is closest to:

            A)      $42,056

            B)      $56,000

            C)      $24,000

            D)      $18,032

           

            Ans:  A     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Medium

            Solution:

           

            After-tax cash flow = Before-tax cash flow × (1 − Tax rate)

= $80,000 × (1 − 0.30) = $56,000

Present value factor from Present Value of $1: 0.751

Present value = $56,000 × 0.751 = $42,056

      73. A company anticipates a taxable cash expense of $30,000 in year 4 of a project. The company's tax rate is 30% and its discount rate is 14%. The present value of this future cash flow is closest to:

            A)      $(21,000)

            B)      $(5,329)

            C)      $(9,000)

            D)      $(12,432)

           

            Ans:  D     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Medium

            Solution:

           

            After-tax cash flow = Before-tax cash flow × (1 − Tax rate)

= $30,000 × (1 − 0.30) = $21,000

Present value factor from Present Value of $1: 0.592

Present value = $21,000 × 0.592 = $12,432