Wary
Corporation is considering the purchase of a machine that would cost $240,000
and would last for 9 years. At the end of 9 years, the machine would have a
salvage value of $29,000. The machine would reduce labor and other costs by
$63,000 per year. The company requires a minimum pretax return of 19% on all
investment projects.
Required:
Determine the net present value of
the project. Show your work!
Ans:
|
|
Year(s)
|
Amount
|
19%
Factor
|
PV
|
|
Annual cost savings.....
|
1-9
|
$63,000
|
4.163
|
$262,269
|
|
Initial investment.........
|
Now
|
($240,000)
|
1.000
|
(240,000)
|
|
Salvage value...............
|
9
|
$29,000
|
0.209
|
6,061
|
|
Net present value.........
|
|
|
|
$ 28,330
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
137. (Ignore
income taxes in this problem.) The management of Kinion Corporation is
considering the purchase of a machine that would cost $170,000, would last for
7 years, and would have no salvage value. The machine would reduce labor and
other costs by $50,000 per year. The company requires a minimum pretax return
of 17% on all investment projects.
Required:
Determine the net present value of
the project. Show your work!
Ans:
|
|
Year(s)
|
Amount
|
17%
Factor
|
PV
|
|
Annual cost savings.....
|
1-7
|
$50,000
|
3.922
|
$196,100
|
|
Initial investment.........
|
Now
|
($170,000)
|
1.000
|
( 170,000)
|
|
Net present value.........
|
|
|
|
$ 26,100
|
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
138. (Ignore
income taxes in this problem.) Joanette, Inc., is considering the purchase of a
machine that would cost $240,000 and would last for 5 years, at the end of
which, the machine would have a salvage value of $48,000. The machine would
reduce labor and other costs by $62,000 per year. Additional working capital of
$7,000 would be needed immediately, all of which would be recovered at the end
of 5 years. The company requires a minimum pretax return of 17% on all
investment projects.
Required:
Determine the net present value of
the project. Show your work!
Ans:
|
|
Year(s)
|
Amount
|
17%
Factor
|
PV
|
|
Initial investment...............
|
Now
|
($240,000)
|
1.000
|
($240,000)
|
|
Working capital needed.....
|
Now
|
($7,000)
|
1.000
|
(7,000)
|
|
Annual cost savings...........
|
1-5
|
$62,000
|
3.199
|
198,338
|
|
Working capital released...
|
5
|
$7,000
|
0.456
|
3,192
|
|
Salvage value.....................
|
5
|
$48,000
|
0.456
|
21,888
|
|
Net present value...............
|
|
|
|
($ 23,582)
|
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
139. (Ignore
income taxes in this problem.) The management of Harling Corporation is
considering the purchase of a machine that would cost $90,504 and would have a
useful life of 5 years. The machine would have no salvage value. The machine
would reduce labor and other operating costs by $27,000 per year.
Required:
Determine the internal rate of
return on the investment in the new machine. Show your work!
Ans:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $90,504 ÷ $27,000 = 3.352
The factor of 3.352 for 5 years
represents an internal rate of return of 15%.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
140. (Ignore
income taxes in this problem.) Maxcy Limos, Inc., is considering the purchase
of a limousine that would cost $187,335, would have a useful life of 9 years,
and would have no salvage value. The limousine would bring in cash inflows of
$45,000 per year in excess of its cash operating costs.
Required:
Determine the internal rate of
return on the investment in the new limousine. Show your work!
Ans:
Factor of the internal rate of
return
= Investment required ÷ Net annual
cash inflow = $187,335 ÷ $45,000 = 4.163
The factor of 4.163 for 9 years
represents an internal rate of return of 19%.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
141. (Ignore
income taxes in this problem.) The management of Zachery Corporation is
considering the purchase of a automated molding machine that would cost
$203,255, would have a useful life of 5 years, and would have no salvage value.
The automated molding machine would result in cash savings of $65,000 per year
due to lower labor and other costs.
Required:
Determine the internal rate of
return on the investment in the new automated molding machine. Show your work!
Ans:
Factor of the internal rate of return
= Investment required ÷ Net annual
cash inflow = $203,255 ÷ $65,000 = 3.127
The factor of 3.127 for 5 years
represents an internal rate of return of 18%.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
142. (Ignore
income taxes in this problem.) The management of an amusement park is
considering purchasing a new ride for $60,000 that would have a useful life of
15 years and a salvage value of $8,000. The ride would require annual operating
costs of $26,000 throughout its useful life. The company's discount rate is
10%. Management is unsure about how much additional ticket revenue the new ride
would generate-particularly since customers pay a flat fee when they enter the
park that entitles them to unlimited rides. Hopefully, the presence of the ride
would attract new customers.
Required:
How much additional revenue would
the ride have to generate per year to make it an attractive investment?
Ans:
|
|
Years
|
Amount
|
10%Factor
|
Present
Value
|
|
Cost of asset.......................
|
Now
|
$(60,000)
|
1.000
|
($ 60,000)
|
|
Annual operating costs......
|
1-15
|
$(26,000)
|
7.606
|
( 197,756)
|
|
Salvage value.....................
|
15
|
$8,000
|
0.239
|
1,912
|
|
Net present value...............
|
|
|
|
($255,844)
|
$255,844 ÷ 7.606 = $33,637
additional revenue per year would be necessary to justify the investment. This
much additional revenue would result in a zero net present value. Any less than
this and the net present value would be negative. Any more than this and the
net present value would be positive.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Hard
143. (Ignore
income taxes in this problem.) Devon Corporation uses a discount rate of 8% in
its capital budgeting. Partial analysis of an investment in automated equipment
with a useful life of 8 years has thus far yielded a net present value of
-$496,541. This analysis did not include any estimates of the intangible
benefits of automating this process nor did it include any estimate of the
salvage value of the equipment.
Required:
a. Ignoring any salvage value, how large would the additional cash
flow per year from the intangible benefits have to be to make the investment in
the automated equipment financially attractive?
b. Ignoring any cash flows from intangible benefits, how large
would the salvage value of the automated equipment have to be to make the
investment in the automated equipment financially attractive?
Ans:
a. Minimum annual cash flows from the intangible benefits
= Negative net present value to
be offset ÷ Present value factor
= $496,541 ÷ 5.747 = $86,400
b. Minimum salvage value
= Negative net present value to
the offset ÷ Present value factor
= $496,541 ÷ 0.540 = $919,520
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
144. (Ignore
income taxes in this problem.) The management of Crosson Corporation is
investigating the purchase of a new satellite routing system with a useful life
of 9 years. The company uses a discount rate of 17% in its capital budgeting.
The net present value of the investment, excluding its intangible benefits, is
-$173,055.
Required:
How large would the additional cash
flow per year from the intangible benefits have to be to make the investment in
the automated equipment financially attractive?
Ans:
Minimum annual cash flows from the
intangible benefits
= Negative net present value to be
offset ÷ Present value factor
= $173,055 ÷ 4.451 = $38,880
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
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