ACCT525 Administrative Controls

Chapter 8

1. A company is considering purchasing a machine for $24,895. The machine will generate an income before tax of $2,765 per year. Annual depreciation expense would be $1,047. What is the payback period for the new machine?

Enter your answer to the nearest 2 decimal places (example 6.25 or -6.25). Do not include commas or words

2. A company is considering the purchase of a new machine for $48,897. Management predicts that the machine can produce sales of $16,926 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $7,667 per year plus depreciation of $4,329 per year. The company's tax rate is 39%. What is the payback period for the new machine?

Enter your answer to the nearest 2 decimal places (example 6.25 or -6.25). Do not include commas or word

3. Nicholas Alexander Corporation is considering the purchase of new equipment costing $30,720. The projected annual net cash flow from the equipment is $11,178. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Daniels requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows: 1 Period - .08929; 2 Period 1.6901; 3 Periods 2.4018; 4 Periods 3.0373

What is the net present value of this investment? Enter your answer as a whole number with no commas, decimal points, or words. Example: 1000 not 1,000.25 Enter negative numbers as -10 not (10)

4. Edward Noble Corporation is considering the purchase of new equipment costing $31,386. The projected annual before-tax net income from the equipment is $1,366, after deducting $9,970 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of 3 years and no salvage value. Daniels requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows: 1 Period - .08929; 2 Period 1.6901; 3 Periods 2.4018; 4 Periods 3.0373

What is the net present value of this investment? Enter your answer as a whole number with no commas, decimal points, or words. Example: 1000 not 1,000.25 Enter negative numbers as -10 not (10)

5. A company can buy a machine that is expected to have a three-year life and a $3,474 salvage value. The machine will cost $177,085 and is expected to produce a $20,724 before-tax net income to be received at the end of each year. If a table of present values of $1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the investment, discounted at 12%? Ignore income tax for this problem.

6. Two investments with exactly the same payback periods are always equally valuable to an investor.

True

False

7. If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.

True

False

8. The internal rate of return equals the rate that yields a net present value of zero for an investment.

True

False

9. If the IRR is less than or equal to the companys required rate of return (often called the hurdle rate), the investment is accepted; otherwise, the investment is rejected.

True

False

10. Both methods of evaluating long-term investments, NPV and IRR, focus on the amount of cash flows and when the cash flows occur.

True

False

Note: Would like a Microsoft Excel spreadsheet, to be used. To show how the questions were worked to be answered.