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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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