Question Details

ACC 202 CHAPTER 12 PLANNING FOR CAPITAL INVESTMENTS PART 1


Brief Exercises
BE  158
Diamond Company is considering investing in new equipment that will cost $1,400,000 with a 10-year useful life. The new equipment is expected to produce annual net income of $90,000 over its useful life. Depreciation expense, using the straight-line rate, is $140,000 per year.
Instructions
Compute the cash payback period.



BE  159
Madeline Company is proposing to spend $200,000 to purchase a machine that will provide annual cash flows of $38,000. The appropriate present value factor for 10 periods is 5.65.
Instructions
Compute the proposed investment- net present value and indicate whether the investment should be made by Madeline Company.


BE  160
LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects to use the dock for 5 years, after which it will be sold for $300,000. LakeFront anticipates annual cash flows of $110,000 resulting from the new dock. The company- borrowing rate is 8%, while its cost of capital is 10%.
Instructions
Calculate the net present value of the dock and indicate whether LakeFront should make the investment.


BE  161
Mobil Company has hired a consultant to propose a way to increase the company- revenues. The consultant has evaluated two mutually exclusive projects with the following information provided for each project:
	Project Turtle	Project Snake
Capital investment	$1,105,000	$625,000
Annual cash flows	180,000	105,000
Estimated useful life	10 years	10 years

Mobil Company uses a discount rate of 9% to evaluate both projects.

Instructions
(a)	Calculate the net present value of both projects.
(b)	Calculate the profitability index for each project.
(c)	Which project should Mobil accept?


Ex. 162
Carlson Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $300,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $52,500. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Assume a discount rate of 9% 

Ex. 163
Stanton Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $490,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $90,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $510,000, will have a useful life of 11 years, and will produce net annual cash flows of $77,000 per year. Evaluate the success of the project. Assume a discount rate of 10%


BE  164
Mint Company is contemplating an investment costing $135,000. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $25,305.

Instructions
What is the approximate internal rate of return associated with this investment?

BE  165
Salt Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $220,000, but it will also increase annual expenses by $160,000. The facility will cost $980,000 to build, and it will have a $20,000 salvage value at the end of its useful life.

Instructions
Calculate the annual rate of return on this facility.

Exercises
Ex. 166
Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he wants will cost $215,000. In addition, Austin estimates that the new machine will increase the company- annual net cash inflows by $33,000. The machine will have a 12-year useful life and no salvage value.

Instructions
(a)	Calculate the cash payback period. 
(b)	Calculate the machine- internal rate of return.
(c)	Calculate the machine- net present value using a discount rate of 10%.
(d)	Assuming Corn Doggy, Inc.- cost of capital is 10%, is the investment acceptable? Why or why not?


Ex. 168
Gantner Company is considering a capital investment of $300,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $27,000 and $87,000, respectively. Gantner has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment.

Instructions
(Round to two decimals.)
(a)	Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure.
(b)	Using the discounted cash flow technique, compute the net present value.



Ex. 169
Top Growth Farms, a farming cooperative, is considering purchasing a tractor for $551,500. The machine has a 10-year life and an estimated salvage value of $36,000. Delivery costs and set-up charges will be $12,100 and $400, respectively. Top Growth uses straight-line depreciation.

Top Growth estimates that the tractor will be used five times a week with the average charge to the individual farmers of $400. Fuel is $50 for each use of the tractor. The present value of an annuity of 1 for 10 years at 9% is 6.418.

Instructions
For the new tractor, compute the:
(a)	cash payback period.
(b)	net present value.
(c)	annual rate of return.

Ex. 170 
Tom Bat became a baseball enthusiast at a very early age. All of his baseball experience has provided him valuable knowledge of the sport, and he is thinking about going into the batting cage business. He estimates the construction of a state-of-the-art building and the purchase of necessary equipment will cost $840,000. Both the facility and the equipment will be depreciated over 12 years using the straight-line method and are expected to have zero salvage values. His required rate of return is 9% (present value factor of 7.1607). Estimated annual net income and cash flows are as follows:
	Revenue		$350,500
	Less:	
		Utility cost	40,000
		Supplies	8,000
		Labor	141,000
		Depreciation	70,000
		Other	  38,500	  297,500
	Net income		$  53,000
Instructions
For this investment, calculate:
(a)	The net present value.
(b)	The internal rate of return.
(c)	The cash payback period.