Question Details

ACC 202 CHAPTER 12 PLANNING FOR CAPITAL INVESTMENTS PART 2


Ex. 171
Mimi Company is considering a capital investment of $275,000 in new equipment. The equipment is expected to have a 5-year useful life 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 $25,000 and $80,000, respectively. Mimi's minimum required rate of return is 10%. The present value of 1 for 5 periods at 10% is .621 and the present value of an annuity of 1 for 5 periods at 10% is 3.791.

Instructions
Compute each of the following:
(a)	cash payback period.
(b)	net present value.
(c)	annual rate of return.

Ex. 172
Savanna Company is considering two capital investment proposals. Relevant data on each project are as follows:
	Project Red	Project Blue
Capital investment	$440,000	$640,000
Annual net income	25,000	60,000
Estimated useful life	8 years	8 years

Depreciation is computed by the straight-line method with no salvage value. Savanna requires an 8% rate of return on all new investments. The present value of 1 for 8 periods at 8% is .540 and the present value of an annuity of 1 for 8 periods is 5.747.

Instructions
(a)	Compute the cash payback period for each project.
(b)	Compute the net present value for each project.
(c)	Compute the annual rate of return for each project.
(d)	Which project should Savanna select?

Ex. 173
Yappy Company is considering a capital investment of $320,000 in additional equipment. The new equipment is expected to have a useful life of 8 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 $22,000 and $62,000, respectively. Yappy requires a 10% return on all new investments.
		Present Value of an Annuity of 1	
	Period	  8%		  9%		 10%		 11%		 12%		 15%	
	8	5.747	5.535	5.335	5.146	4.968	4.487

Instructions
(a)	Compute each of the following:
	1.	Cash payback period.
	2.	Net present value.
	3.	Profitability index.
	4	Internal rate of return.
	5.	Annual rate of return.
(b)	Indicate whether the investment should be accepted or rejected.
Ex. 174
Laramie Service Center just purchased an automobile hoist for $16,900. The hoist has a 5-year life and an estimated salvage value of $1,250. Installation costs were $3,770, and freight charges were $960. Laramie uses straight-line depreciation.
The new hoist will be used to replace mufflers and tires on automobiles. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler sells for $85 installed. The cost of a muffler is $46, and the labor cost to install a muffler is $13.

Instructions
(a)	Compute the payback period for the new hoist.
(b)	Compute the annual rate of return for the new hoist. (Round to one decimal.)

Ex. 175
Sophie- Pet Shop is considering the purchase of a new delivery van. Sophie Smith, owner of the shop, has compiled the following estimates in trying to determine whether the delivery van should be purchased:

	Cost of the van	$35,000
	Annual net cash flows	6,000
	Salvage value	4,000
	Estimated useful life	8 years
	Cost of capital	10%
	Present value of an annuity of 1	5.335
	Present value of 1	.467

Sophie's assistant manager is trying to convince Sophie that the van has other benefits that she hasn't considered in the initial estimates. These additional benefits, including the free advertising the store's name painted on the van's doors will provide, are expected to increase net cash flows by $500 each year.

Instructions
(a)	Calculate the net present value of the van, based on the initial estimates. Should the van be purchased?
(b)	Calculate the net present value, incorporating the additional benefits suggested by the assistant manager. Should the van be purchased?
(c)	Determine how much the additional benefits would have to be worth in order for the van to be purchased.

Ex. 176
Vista Company is considering two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash inflows:

	Year	   Cool		     Hot	
	1	$  38,000	$  42,000
	2	43,000	42,000
	3	    48,000	    42,000
		$129,000	$126,000

The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%.

Present value data are as follows:

		Present Value of 1		Present Value of an Annuity of 1
	Period	12%		Period	 12%	
	1	.893	1	.893
	2	.797	2	1.690
	3	.712	3	2.402

Instructions
(a)	Compute the net present value of each project.
(b)	Compute the profitability index of each project.
(c)	Which project should be selected?  Why?


Ex. 177
KSU Corp. is considering purchasing one of two new diagnostic machines.  Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below.

		Machine A	Machine B
	Original cost	$106,000	$  175,000
	Estimated life	8 years	8 years
	Salvage value	-0-	-0-
	Estimated annual cash inflows	$30,000	$45,000
	Estimated annual cash outflows	$10,000	$15,000

Instructions

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased?


Ex. 178
Santana Company is considering investing in a project that will cost $151,000 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows of $40,000 each year. The company requires a 9% rate of return and uses the following compound interest table:

Present Value of an Annuity of 1
	Period	  6% 		  8% 		   9%		 10%		 11%		 12%		 15%	
	5	4.212	3.993	3.890	3.791	3.696	3.605	3.352

Instructions
(a)	Compute (1) the net present value and (2) the profitability index of the project.
(b)	Compute the internal rate of return on this project.
(c)	Should Santana invest in this project?


Ex. 179
Johnson Company is considering purchasing one of two new machines. The following estimates are available for each machine:
	Machine 1	Machine 2
	Initial cost	$152,000	$169,000
	Annual cash inflows	50,000	60,000
	Annual cash outflows	15,000	20,000
	Estimated useful life	6 years	6 years

The company's minimum required rate of return is 9%.

		Present Value of an Annuity of 1	
	Period	  8%		  9%		 10%		 11%		 12%		 15%	
	6	4.623	4.486	4.355	4.231	4.111	3.784

Instructions
(a)	Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each machine.
(b)	Which machine should be purchased?

Ex. 180
Platoon Company is performing a post-audit of a project that was estimated to cost $420,000, have a useful life of 6 years with a zero salvage value, and result in net cash inflows of $100,000 per year. After the investment was in operation for a year, revised figures indicate that it actually cost $470,000, will have a 9-year useful life, and will produce net cash inflows of $77,000. The present value of an annuity of 1 for 6 years at 10% is 4.355 and for 9 years is 5.759.

Instructions
Determine whether the project should have been accepted based on (a) the original estimates and then on (b) the actual amounts.

Ex. 181
Shilling Corp. is thinking about opening a baseball camp in Florida. In order to start the camp, the company would need to purchase land, build five baseball fields, and a dormitory-type sleeping and dining facility to house 100 players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college baseball players as coaches. The camp attendees would be baseball players age 12-18. Property values in Florida have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Shilling can sell the property for more than it was originally purchased for. The following amounts have been estimated:
	Cost of land	$   630,000
	Cost to build dorm and dining facility	2,100,000
	Annual cash inflows assuming 100 players and 10 weeks	2,520,000
	Annual cash outflows	2,260,000
	Estimated useful life	20 years
	Salvage value	4,400,000
	Discount rate	10%
	Present value of an annuity of 1	8.514
	Present value of 1	.149
Ex. 181	(Cont.)
Instructions
(a)	Calculate the net present value of the project.
(b)	To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each week, revenues will be $2,085,000 and expenses will be $1,865,000. What is the net present value using these alternative estimates?  Discuss your findings.
(c)	Assuming the original facts, what is the net present value if the project is actually riskier than first assumed, and a 12% discount rate is more appropriate?  The present value of 1 at 12% is .104 and the present value of an annuity of 1 is 7.469.


Ex. 182
Ace Corporation recently purchased a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $250,000 in annual cash flows for a period of five years. The required rate of return is 8%. The new machine is expected to have zero salvage value at the end of the five-year period.

Instructions
Calculate the internal rate of return. (Table 4 from Appendix C is needed.)