4 Managerial Accounting questions

Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $55,950. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,560. At the end of 8 years the company will sell the truck for an estimated $27,610. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset's estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company's cost of capital is 8%. (Refer the below table). Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5. Round Discount Factor to 5 decimal places, e.g. 0.17986.) Cash payback period Net present value years $ Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $23,320. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $7,420 $10,600 $13,780 2 9,540 10,600 12,720 3 12,720 10,600 11,660 $29,680 $31,800 $38,160 Total The equipment's salvage value is zero, and Doug uses straightline depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug's required rate of return is 12%. (Refer the below table) Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) AA years BB years C C years Which is the most desirable project? The most desirable project based on payback period is Which is the least desirable project? The least desirable project based on payback period is Henkel Company is considering three longterm capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows. P r oj e Proje ct Project Oscar Lima ct K il o Capital investme nt $167,400 Annual net income: $178,200 $200,85 0 Year 1 18,900 29,700 2 14,040 17,820 24,300 3 14,040 16,740 23,220 4 14,040 12,420 14,580 5 14,040 14,040 9,180 13,500 $70,200 $75,060 Total $105,300 Depreciation is computed by the straightline method with no salvage value. The company's cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.) (Refer the below table) Compute the cash payback period for each project. (Round answers to 2 decimal places, e.g. 10.50.) Project Kilo years Project Lima years Project Oscar years Goltra Clinic is considering investing in new heart-monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 6%. Option A Initial cost Option B $191,000 $263,000 Annual cash inflows $72,000 $81,800 Annual cash outflows $28,100 $26,700 Cost to rebuild (end of year 4) $51,100 $0 $0 $7,900 Salvage value Estimated useful life 7 years 7 years Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value to 0 decimal places, e.g. 125. Round profitability index to 2 decimal places, e.g. 10.50. Round answers for IRR to 0 decimal places, e.g. 12. Round Discount Factor to 5 decimal places.) Net Present Value Profitability Index Internal Rate of Return Option A $ % Option B $ %