Question
1. A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating
1. A company with $500,000 in operating assets is considering the purchase of a machine that costs $60,000 and which is expected to reduce operating costs by $15,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to (Ignore income taxes.):
A) 0.25 years
B) 8.3 years
C) 4 years
D) 33.3 years
2. Parks Corporation is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is closest to (Ignore income taxes.):
See separate handout to determine the appropriate discount factor(s) using the tables provided.
A) $1,290
B) $(1,290)
C) $2,000
D) $4,350
3. Penniston Corporation is considering a capital budgeting project that would require an initial investment of $630,000 and working capital of $73,000. The working capital would be released for use elsewhere at the end of the project in 3 years. The investment would generate annual cash inflows of $228,000 for the life of the project. At the end of the project, equipment that had been used in the project could be sold for $29,000. The company's discount rate is 12%. The net present value of the project is closest to:
See separate handout to determine the appropriate discount factor(s) using the tables provided.
A) $(134,696)
B) $(82,720)
C) $(9,720)
D) $54,000
4. Charlie Corporation is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 6 years. The new machine will cost $3,600 a year to operate, as opposed to the old machine, which costs $3,800 per year to operate. Also, because of increased capacity, an additional 20,000 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $7,000 and the new machine costs $30,000. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.):
A) $2,200
B) $200
C) $2,000
D) $5,000
5. The management of Elamin Corporation is considering the purchase of a machine that would cost $365,695 and would have a useful life of 9 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $61,000 per year. The internal rate of return on the investment in the new machine is closest to (Ignore income taxes.):
See separate Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.
A) 9%
B) 11%
C) 12%
D) 10%
THIS IS THE handout
Time Value of Money Factor for the Present Value of a Sum | ||||||||||||||
PV =FV * TVM Factor | Present Value of a Sum = FV * 1/ (1 + i) n | |||||||||||||
| 2% | 3% | 4% | 5% | 6% | 8% | 10% | 12% |
| |||||
1 | 0.9804 | 0.9709 | 0.9615 | 0.9524 | 0.9434 | 0.9259 | 0.9091 | 0.8929 | ||||||
2 | 0.9612 | 0.9426 | 0.9246 | 0.9070 | 0.8900 | 0.8573 | 0.8264 | 0.7972 | ||||||
3 | 0.9423 | 0.9151 | 0.8890 | 0.8638 | 0.8396 | 0.7938 | 0.7513 | 0.7118 | ||||||
4 | 0.9238 | 0.8885 | 0.8548 | 0.8227 | 0.7921 | 0.7350 | 0.6830 | 0.6355 | ||||||
5 | 0.9057 | 0.8626 | 0.8219 | 0.7835 | 0.7473 | 0.6806 | 0.6209 | 0.5674 | ||||||
6 | 0.8880 | 0.8375 | 0.7903 | 0.7462 | 0.7050 | 0.6302 | 0.5645 | 0.5066 | ||||||
7 | 0.8706 | 0.8131 | 0.7599 | 0.7107 | 0.6651 | 0.5835 | 0.5132 | 0.4523 | ||||||
8 | 0.8535 | 0.7894 | 0.7307 | 0.6768 | 0.6274 | 0.5403 | 0.4665 | 0.4039 | ||||||
9 | 0.8368 | 0.7664 | 0.7026 | 0.6446 | 0.5919 | 0.5002 | 0.4241 | 0.3606 | ||||||
10 | 0.8203 | 0.7441 | 0.6756 | 0.6139 | 0.5584 | 0.4632 | 0.3855 | 0.3220 | ||||||
20 | 0.6730 | 0.5537 | 0.4564 | 0.3769 | 0.3118 | 0.2145 | 0.1486 | 0.1037 | ||||||
25 | 0.6095 | 0.4776 | 0.3751 | 0.2953 | 0.2330 | 0.1460 | 0.0923 | 0.0588 | ||||||
Time Value of Money Factor for the Present Value of an Annuity | ||||||||||||||
PV = Annuity * TVM Factor | Present Value of an Annuity = X*((1-(1/(1+i)^n))/i) | |||||||||||||
| 2% | 3% | 4% | 5% | 6% | 8% | 10% | 12% |
| |||||
1 | 0.9804 | 0.9709 | 0.9615 | 0.9524 | 0.9434 | 0.9259 | 0.9091 | 0.8929 | ||||||
2 | 1.9416 | 1.9135 | 1.8861 | 1.8594 | 1.8334 | 1.7833 | 1.7355 | 1.6901 | ||||||
3 | 2.8839 | 2.8286 | 2.7751 | 2.7232 | 2.6730 | 2.5771 | 2.4869 | 2.4018 | ||||||
4 | 3.8077 | 3.7171 | 3.6299 | 3.5460 | 3.4651 | 3.3121 | 3.1699 | 3.0373 | ||||||
5 | 4.7135 | 4.5797 | 4.4518 | 4.3295 | 4.2124 | 3.9927 | 3.7908 | 3.6048 | ||||||
6 | 5.6014 | 5.4172 | 5.2421 | 5.0757 | 4.9173 | 4.6229 | 4.3553 | 4.1114 | ||||||
7 | 6.4720 | 6.2303 | 6.0021 | 5.7864 | 5.5824 | 5.2064 | 4.8684 | 4.5638 | ||||||
8 | 7.3255 | 7.0197 | 6.7327 | 6.4632 | 6.2098 | 5.7466 | 5.3349 | 4.9676 | ||||||
9 | 8.1622 | 7.7861 | 7.4353 | 7.1078 | 6.8017 | 6.2469 | 5.7590 | 5.3282 | ||||||
10 | 8.9826 | 8.5302 | 8.1109 | 7.7217 | 7.3601 | 6.7101 | 6.1446 | 5.6502 | ||||||
20 | 16.3514 | 14.8775 | 13.5903 | 12.4622 | 11.4699 | 9.8181 | 8.5136 | 7.4694 | ||||||
25 | 19.5235 | 17.4131 | 15.6221 | 14.0939 | 12.7834 | 10.6748 | 9.0770 | 7.8431 | ||||||
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