Heap Company is considering an investment in a project that will have a two year life.

32. (Ignore income taxes in this problem.) Heap Company is considering an investment in a project that will have a two year life. The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year. What investment is required in the project?

            A)      $74,340

            B)      $77,660

            C)      $81,810

            D)      $90,000

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1,2     Level:  Hard     Source:  CMA, adapted

            Solution:

           

	Year(s)	Amount	10% Factor	PV
Cash inflow−1st year..........	1	40,000	0.909	$36,360
Cash inflow−2nd year.........	2	50,000	0.826	41,300
Net present value...............				$77,660

For the net present value of this project to be zero, the initial investment should be equal to the present value of the cash inflows, or $77,660.

      33. (Ignore income taxes in this problem.) Congener Beverage Corporation is considering an investment in a capital budgeting project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to be $100,000 per year in each of the 8 years. Congener's discount rate is 16%. What is the net present value of this project?

            A)      $5,215

            B)      $15,464

            C)      $50,700

            D)      $55,831

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1,2     Level:  Hard

            Solution:

            Internal rate of return factor = Initial investment ÷ Annual inflows

            Look up the factor in the table Present Value of an Annuity of $1 in Arrears for 8 periods, 20% column; the factor is 3.837. Substituting into the above equation, 3.837 = Initial investment ÷ $100,000

            Initial investment = $383,700.

           

	Year(s)	Amount	16% Factor	PV
Initial investment...............	Now	($383,700)	1.000	($383,700)
Annual net cash receipts....	1-8	$100,000	4.344	434,400
Net present value...............				$  50,700

      34. (Ignore income taxes in this problem.) The Able Company is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 2 years. The new machine will cost $2,500 a year to operate, as opposed to the old machine, which costs $2,700 per year to operate. Also, because of increased capacity, an additional 10,000 donuts a year can be produced. The company makes a contribution margin of $0.02 per donut. The old machine can be sold for $5,000 and the new machine costs $25,000. The incremental annual net cash inflows provided by the new machine would be:

            A)      $200

            B)      $400

            C)      $5,200

            D)      $5,400

           

            Ans:  B     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Hard

            Solution:

           

Operating cost savings per year ($2,700 − $2,500)........................	$200
Additional contribution margin provided by the new donut maker ($0.02 × 10,000).........................................................................	200
Incremental annual net cash inflows provided by new machine....	$400

      35. (Ignore income taxes in this problem.) Given the following data:

           

	Initial investment...............	$80,000
	Annual cash inflow............	?
	Salvage value.....................	$0
	Net present value...............	$13,600
	Life of the project..............	6 years
	Discount rate......................	16%

            Based on the data given above, the annual cash inflow from the project after the initial investment is closest to:

            A)      $50,116

            B)      $21,710

            C)      $25,400

            D)      $38,376

           

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

            Solution:

           

            First, set up table:

	Year(s)	Amount	16% Factor	PV
Initial investment...............	Now	$80,000	1.000	($80,000)
Annual cash inflows..........	1-6	?	3.685	?
Net present value...............				$13,600

Second, solve for the present value of the annual cash inflow:

PV of annual cash inflow = $13,600 − (-$80,000) = $93,600

Finally, solve for the annual cash inflow:

Annual cash inflow × 3.685 = $93,600

Annual cash inflow = $25,400

      36. (Ignore income taxes in this problem.) Virginia Company invested in a four-year project. Virginia's discount rate is 10%. The cash inflows from this project are:

           

	Year	Cash Inflow
	1	$4,000
	2	$4,400
	3	$4,800
	4	$5,200

            Assuming a positive net present value of $1,000, the amount of the original investment was closest to:

            A)      $2,552

            B)      $4,552

            C)      $13,427

            D)      $17,400

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Hard     Source:  CPA, adapted

            Solution:

           

            Net present value of cash inflows − Original investment = Net present value of project

Original investment = NPV of cash inflows − NPV of project

= $14,427 − $1,000 = $13,427

	Year(s)	Amount	10% Factor	PV
Year 1 inflow...............................	1	$4,000	0.909	$  3,636
Year 2 inflow...............................	2	$4,400	0.826	3,634
Year 3 inflow...............................	3	$4,800	0.751	3,605
Year 4 inflow...............................	4	$5,200	0.683	3,552
Net present value of cash inflows				$14,427

      37. (Ignore income taxes in this problem.) Para Corporation is reviewing the following data relating to an energy saving investment proposal:

           

	Initial investment...............	$50,000
	Life of the project..............	5 years
	Salvage value.....................	$10,000
	Annual cash savings..........	?

            What annual cash savings would be needed in order to satisfy the company's 12% required rate of return (rounded to the nearest one hundred dollars)?

            A)      $10,600

            B)      $11,100

            C)      $12,300

            D)      $13,900

           

            Ans:  C     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Hard     Source:  CPA, adapted

            Solution:

           

	Years	Amount	12% Factor	Present Value
Total investment................	Now	($50,000)	1.000	($50,000)
Annual cash savings..........	1-5	?	3.605	?
Salvage value.....................	5	$10,000	0.567	5,670
Net present value...............				$         0

To solve for the present value of the annual cash savings:

-$50,000 + PV of annual cash savings + $5,670 = $0

PV of annual cash savings = $44,330

To solve for the amount of the annual cash savings:

Amount of annual cash savings × 3.605 = $44,330

Amount of annual cash savings = $12,297, which rounds to $12,300

      38. (Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting project. This project will initially require a $25,000 investment in equipment and a $3,000 working capital investment. The useful life of this project is 5 years with an expected salvage value of zero on the equipment. The working capital will be released at the end of the 5 years. The new system is expected to generate net cash inflows of $9,000 per year in each of the 5 years. Nevus' discount rate is 14%. The net present value of this project is closest to:

            A)      $(3,088)

            B)      $3,383

            C)      $4,454

            D)      $5,897

           

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

            Solution:

           

	Year(s)	Amount	14% Factor	PV
Initial investment...............	Now	($25,000)	1.000	($25,000)
Working capital needed.....	Now	($3,000)	1.000	(    3,000)
Annual cost savings...........	1-5	$9,000	3.433	30,897
Working capital released...	5	$3,000	0.519	1,557
Net present value...............				$  4,454

      39. (Ignore income taxes in this problem.) The Malaise Prevention Agency is a non-profit organization that does all of its own informational printing. The printing press that Malaise currently is using needs a $20,000 overhaul. This will extend the useful life of the press by 8 years. As an alternative, Malaise could buy a brand new modern press for $45,000. The new press would also last 8 years. The annual operating expenses of the old press are $12,000. The annual operating expenses of the new press will only be $7,000. The old press is not expected to have a salvage value in 8 years. The new press is expected to have a $6,000 salvage value in 8 years. Malaise's discount rate is 14%. The net present value of the decision to buy the new press instead of overhauling the old press is closest to:

            A)      $301

            B)      $(301)

            C)      $4,195

            D)      $(46,089)

           

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

            Solution:

           

	Year(s)	Amount	14% Factor	PV
Initial investment...............	Now	($45,000)	1.000	($45,000)
Annual cost savings ($12,000 − $7,000)........	1-8	$5,000	4.639	23,195
Salvage value.....................	8	$6,000	0.351	2,106
Net present value of new press...............................				($19,699)

Cost to overhaul old press................	$20,000
NPV of new press............................	19,699
NPV of new press vs. old press.......	$     301