Question
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
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