Exercise 12-6 Simple Rate of Return Method [LO12-6) The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $43.000 The machine would replace an old piece of equipment that costs $11,000 per year to operate. The new machine would cost $5,000 per year to operate. The old machine currently in use could be sold now for a salvage value of $17,000. The new machine would have a useful life of 10 years with no salvage value Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) 1 2 Depreciation expense Incremental net operating income Initial investment Simple rate of return 3 4 % Perit Industries has $130,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A Project 8 $130,000 $ @ s $130, eee $ 21,000 $ 65,000 $ 8,100 $ 6 years 6 years The working capital needed for project will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 17% Click here to view Exhibit 128-1 and Exhibit 12B-2. to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project A. (Enter negative value with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. Compute the net present value of Project B. (Enter negative value with a minus sign, Round your final answer to the nearest whole dollar amount.) 3. Which investment alternative (if either) would you recommend that the company accept? Exercise 12-15 Internal Rate of Return and Net Present Value (LO12-2, LO12-3] Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $151,640, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $40,000 per year. The machine would have a five-year useful life and no salvage value Click here to view Exhibit 128-1 and Exhibit 12B-2. to determine the appropriate discount factor(s) using table. Required: 1. What is the machine's internal rate of return? (Round your final answer to the nearest whole percentage.) 2. Using a discount rate of 10%, what is the machine's net present value? 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $36,000 per year Under these conditions, what is the internal rate of return? (Round your final answer to the nearest whole percentage.) % 1 Internal rate of return 2. Net present value 3. Internal rate of return %
