ACC/560 ACC560 ACC 560 WEEK 8 HOMEWORK

ACC 560 WEEK 8 HOMEWORK

Week 8 Homework

• Week 8 Chapter 12: Exercises 3, 5, and 8; Problem 4

E12-3Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $250,000. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7:

Year 1             $390,000

2          400,000

3          411,000

4          426,000

5          434,000

6          435,000

7          436,000

The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $400,000. This new equipment would require maintenance costs of $100,000 at the end of the fifth year. The cost of capital is 9%.

Instructions

Use the net present value method to determine whether Hillsong should purchase the new machine to replace the existing machine, and state the reason for your conclusion.

E12-5 Bruno Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $430,000. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $101,000 for the next 6 years. Management requires a 10% rate of return on all new investments.

Instructions

Calculate the internal rate of return on this new machine. Should the investment be accepted?

E12-8 Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $300,000. A new salon will normally generate annual revenues of $70,000, with annual expenses (including depreciation) of $41,500. At the end of 15 years the salon will have a salvage value of $80,000.

Instructions

Calculate the annual rate of return on the project.