1.

Average Rate of ReturnCost Savings

Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $90,000 with a $8,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $35,380 per year. In addition, the equipment will have operating and energy costs of $8,690 per year.

Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent. %

2.

Cash payback period for a Service Company

Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $200,000 and each with an eight-year life and expected total net cash flows of $320,000. Location 1 is expected to provide equal annual net cash flows of $40,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1	$90,000		Year 5	$29,000
Year 2	68,000		Year 6	22,000
Year 3	42,000		Year 7	17,000
Year 4	38,000		Year 8	14,000

Determine the cash payback period for both location proposals.

Location 1	years
Location 2	years

3.

Net Present Value Method

The following data are accumulated by Paxton Company in evaluating the purchase of $84,900 of equipment, having a four-year useful life:

	Net Income		Net Cash Flow
Year 1	$30,000		$50,000
Year 2	18,000		39,000
Year 3	9,000		29,000
Year 4	(1,000)		20,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of net cash flow	$
Amount to be invested	$
Net present value	$

b. Would management be likely to look with favor on the proposal? The net present value indicates that the return on the proposal is than the minimum desired rate of return of 15%.