Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Answer the following independent questions. Support your answers with clearly identified formulas and computation. a. A company is considering purchasing factory equipment that costs $400,000

Answer the following independent questions. Support your answers with clearly identified formulas and computation.

a. A company is considering purchasing factory equipment that costs $400,000 and is

estimated to have no salvage value at the end of its 5-year useful life. If the equipment is

purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000. The straight-line method of depreciation would be used.

Calculate the cash payback period on the equipment. Show your work

b. Consider the following data (and ignore the impact of income taxes):

Initial cost of equipment $ 962,000

Annual cash inflows $ 191,720

Salvage value $ 0

Estimated life 10 years

Calculate the internal rate of return on this investment. Show your work

c. A company is considering purchasing factory equipment that costs $400,000 and is

estimated to have no salvage value at the end of its 5-year useful life. If the equipment is

purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000. The straight-line method of depreciation would be used.

If the equipment is purchased, calculate the annual rate of return that expected on this

equipment. Show your work

d. Calculate the net present value of a project with the following cash flows if the required rate of return is 14 percent

Year Cash flows

0 $(33,680)

1 10,796

2 22,308

3 4,170.

e. You are considering the following two mutually exclusive projects. The required rate of

return is 13 percent for the project A and 10.5 percent for the project B.

Prove with computation which the project to accept. Support your answer using NPV, IRR, cash payback period, and profitability index methods.

Year Project A Project B

0 $ (54,000) $ (78,000)

1 $ 36,300 $ 35,700

2 $ 24,600 $ 62,800

3 $ 9,500 $ 0

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Quantitative Analysis for Management

Authors: Barry Render, Ralph M. Stair, Michael E. Hanna, Trevor S. Ha

12th edition

133507335, 978-0133507331

More Books

Students also viewed these Finance questions