| Project A | Project B | |||||||||
| Initial investment | $ | (183,325 | ) | $ | (146,960 | ) | ||||
| Expected net cash flows in year: | ||||||||||
| 1 | 50,000 | 42,000 | ||||||||
| 2 | 55,000 | 54,000 | ||||||||
| 3 | 85,295 | 55,000 | ||||||||
| 4 | 80,400 | 69,000 | ||||||||
| 5 | 56,000 | 28,000 | ||||||||
| 1(a) |
For each alternative project compute the net present value.
 |
| Sales | $ | 238,000 | |
| Costs | |||
| Materials, labor, and overhead (except depreciation) | 83,000 | ||
| Depreciation on new equipment | 54,400 | ||
| Selling and administrative expenses | 23,800 | ||
| Total costs and expenses | 161,200 | ||
| Pretax income | 76,800 | ||
| Income taxes (30%) | 23,040 | ||
| Net income | $ | 53,760 | |
Compute the net present value of this investment. (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)
|
| Annual Net Cash Flows* | Present Value of Annuity at 9% | Present Value of Net Cash Flows | ||||||||||
| Years 1 through 7 | $ | 108,160 | 5.0330 | $ | 544,369 | |||||||
| Amount to be invested | (380,800 | ) | ||||||||||
| Net present value of investment | $ | 163,569 | ||||||||||
| Based on this net present value analysis, the investment is acceptable. |
A
machine costs $500,000 and is expected to yield an after-tax net income
of $19,000 each year. Management predicts this machine has a 9-year
service life and a $100,000 salvage value, and it uses straight-line
depreciation. Compute this machine’s accounting rate of return.
|
| Average investment | = | $500,000 + $100,000 | = | $300,000 |
| 2 |
| Accounting rate of return = | Annual after-tax net income |
| Annual average investment |
| Accounting rate of return = $19,000 / $300,000 = 6.33% |
| a. |
A
new operating system for an existing machine is expected to cost
$270,000 and have a useful life of six years. The system yields an
incremental after-tax income of $77,884 each year after deducting its
straight-line depreciation. The predicted salvage value of the system is
$10,000.
|
| b. | A machine costs $190,000, has a $14,000 salvage value, is expected to last eleven years, and will generate an after-tax income of $43,000 per year after straight-line depreciation. |
| Cost of investment | $270,000 | |||||
| Payback period | = | = | = | 2.23 years | ||
| Annual net cash flow | $121,217 |
| Annual after-tax income | $ | 77,884 | |
| Plus depreciation* | 43,333 | ||
| Annual net cash flow | $ | 121,217 | |
| $270,000 – $10,000 | ||||
| *Annual depreciation | = | = | $43,333 | |
| 6 |
| b. |
| Cost of investment | $190,000 | |||||
| Payback period | = | = | = | 3.22 years | ||
| Annual net cash flow | $59,000 |
| Annual after-tax income | $ | 43,000 | |
| Plus depreciation* | 16,000 | ||
| Annual net cash flow | $ | 59,000 | |
| $190,000 – $14,000 | ||||
| *Annual depreciation | = | = | $16,000 | |
| 11 |
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total | |||||||||||||||||||
| Net cash flows | $ | 50,000 | $ | 36,000 | $ | 60,000 | $ | 130,000 | $ | 24,000 | $ | 300,000 | ||||||||||||
| Annual Net Cash Flows | Cumulative Cash Flows | |||||||
| Year 1 | $ | 50,000 | $ | -200,000 | ||||
| Year 2 | 36,000 | -164,000 | ||||||
| Year 3 | 60,000 | -104,000 | ||||||
| Year 4 | 130,000 | 26,000 | ||||||
| Year 5 | 24,000 | 50,000 | ||||||
| Cost of investment | $ | 250,000 | |
| Paid back in years 1-3 | -104,000 | ||
| Paid back in year 4 | $ | 104,000 | |
| Amount paid back in year 4 | $104,000 | |||||
| Part of year | = | = | = | 0.80 | ||
| Net cash flow in year 4 | $130,000 |
| Payback period = 3 + 0.80 = 3.80 years, (or nearly 3 years and 9 months) |