1. Purvell Corporation has just acquired a new machine with the following characteristics (Ignore income taxes.):

Cost of the equipment	$	50,000
Annual cash savings	$	15,000
Life of the machine		8	years

The company uses straight-line depreciation and a $5,000 salvage value. Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage at the end of the project.

The simple rate of return would be closest to:

Multiple Choice

• 30.0%

• 17.5%

• 18.75%

• 12.5%

2. Morrel University has a small shuttle bus that is in poor mechanical condition. The bus can be either overhauled now or replaced with a new shuttle bus. The following data have been gathered concerning these two alternatives (Ignore income taxes.):

	Present Bus			New Bus
Purchase cost new	$	32,000		$	40,000
Remaining net book value	$	21,000			-
Major repair needed now	$	9,000			-
Annual cash operating costs	$	12,000		$	8,000
Salvage value now	$	10,000			-
Trade-in value in seven years	$	2,000		$	5,000

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

The University could continue to use the present bus for the next seven years. Whether the present bus is used or a new bus is purchased, the bus would be traded in for another bus at the end of seven years. The University uses a discount rate of 12% and the total cost approach to net present value analysis.

If the present bus is repaired, the present value of the salvage received on sale of the bus seven years from now is closest to:

Multiple Choice

• $(2,260)

• $2,260

• $904

• $(904)