Question
1. Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five
1. Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $240,438. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7:
Year | 1 | $390,900 | ||
---|---|---|---|---|
2 | 399,800 | |||
3 | 410,100 | |||
4 | 425,400 | |||
5 | 434,000 | |||
6 | 434,900 | |||
7 | 436,400 |
The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $379,100. This new equipment would require maintenance costs of $94,000 at the end of the fifth year. The cost of capital is 9%. Click here to view the factor table. Use the net present value method to determine the following: (If net present value is negative then enter with negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round present value answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Calculate the net present value.
Net present value | $enter the net present value in dollars rounded to 0 decimal places |
Determine whether Hillsong should purchase the new machine to replace the existing machine?
select an option YesNo |
2.
Iggy Company is considering three capital expenditure projects. Relevant data for the projects are as follows.
Project | Investment | Annual Income | Life of Project | ||||
22A | $243,500 | $17,320 | 6 years | ||||
23A | 271,400 | 20,600 | 9 years | ||||
24A | 283,000 | 15,700 | 7 years |
Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Iggy Company uses the straight-line method of depreciation. Click here to view the factor table. (a) Determine the internal rate of return for each project. (Round answers 0 decimal places, e.g. 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Project | Internal Rate of Return | ||
22A | % | ||
23A | % | ||
24A | % |
(b) If Iggy Companys required rate of return is 11%, which projects are acceptable?
The following project(s) are acceptable 22A and 24A22A and 23A23A and 24A22A24A22A, 23A and 24A23A |
3. Vilas Company is considering a capital investment of $196,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $13,034 and $49,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Click here to view the factor table. (a) Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)
Cash payback period | years |
Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%.)
Annual rate of return | % |
(b) Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Net present value |
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