Chapter 11 Problems

I. payback decimal point computation even g oldish hightail its figure out the vengeance period for each of the following 2 separate investment fundss (round the payback period to two decimals) 1. A saucily operating system for an vivacious shape is anticipate to cost $260,000 and have a useful career of five historic period. The system yields an incremental afterwards-tax income of $75,000 each year after deducting its straight-line depreciation. The predicted palliate value of the system is $10,000. payback period=Cost of investment/ yearbook exculpate cash flow =$260,000/ $125,000 =2. 08 years Annual depreciation= $260,000 -$10,000 / 5 = $50,000 Annual after tax income $75,000 Depreciation 50,000 Annual net cash flow$125,000 2. A machine costs $190,000, has a $10,000 salvage value, is expected to last nine years, and will generate an after-tax income of $30,000 per year after straight-line depreciation. Payback period=Cost of investment/ Annual net cash flow =$190 ,000/ $50,000 =3. 8 years Annual depreciation= $190,000 -$10,000 / 9 = $20,000 Annual after tax income $30,000 + Depreciation 20,000 Annual net cash flow$50,000 II. Payback period computation uneven cash flows Wenro Company is considering the purchase of an asset for $90,000. It is expected to produce the following net cash flows.The cash flows bechance evenly throughout each year. count on the payback period for this investment. straggle of year= Amount paid back in year 4/ Net cash flows in year 4 = $10,000 / $60,000 = 0. 167 Payback period=3 + 0. 167 = 3. 1367 years = 3yrs 2 mos. III. Accounting Rate of Return A machine costs $500,000 and is expected to yield an after-tax net income of $15,000 each year. solicitude predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machines accounting rate of return. Average investment=$500,000 + $100,000 / 2 $300,000 Accounting rate of return=$15,000 / $300,000 = 5% IV. Computing Net fork out evaluate K2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to remove 96,000 units of the equipments product each year. The expected annual income related to this equipment follows. K2B concludes that the investment must earn at least an 8% return. Compute the net present value of this investment. Round the net present value to the hot dollar. ) Net cash flows from net income 1. Payback period=$240,000 / $44,500 = 5. 39 years 2. Accounting rate of return=$24,500 / $120,000 = 20. 42% V. Net Present Value Interstate Manufacturing is considering either replacing angiotensin-converting enzyme of its old machines with a new machine or having the old machine overhauled. Information about the two choices follows. Management requires a 10 % rate of return on its investments. election 1 go by the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and thence sold for its salvage value. 1.Determine the net present value of alternative 1. Keep the old machine and have it overhauled Alternative 2 Sell the old machine and buy a new one. The new machine is more(prenominal) efficient and will yield substantial operating cost nest egg with more products being produced and sold. 2. Determine the net present value of alternative 2. Sell the old machine and buy a new one 3. Which alternative do you recommend that management select? Explain. Interstate should grasp the old machine and overhaul it. The cost savings and additional revenue generated on the new machine are not enough to cover the high initial cost of the new machine.