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Question 1

Average Rate of ReturnCost Savings Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $142,000 with a $12,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $44,400 per year. In addition, the equipment will have operating and energy costs of $13,780 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent. Cash payback period for a Service Company Prime Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $150,000 and each with an eight-year life and expected total net cash flows of $240,000. Location 1 is expected to provide equal annual net cash flows of $30,000, and Location 2 is expected to have the following unequal annual net cash flows: Year 1 $59,000 Year 5 $31,000 Year 2 44,000 Year 6 25,000 Year 3 29,000 Year 7 18,000 Year 4 18,000 Year 8 16,000 Determine the cash payback period for both location proposals. Location 1 V years Location 2 V years a. Assuming that the desired rate of return is 6%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Present value of net cash flow Amount to be invested Net present value GEE b. Would management be likely to look with favor on the proposal? V The net present value indicates that the return on the proposal is V than the minimum desired rate of return of 6%. Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase of $142,000 of equipment, having a four-year useful life : Net Income Net Cash Flow Year 1 $31,000 $52,000 Year 2 19,000 40,000 Year 3 9,000 30,000 Year 4 (1,000) 20,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% H 0.943 0.909 0.893 0.870 0.833 N 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 0.665 0.513 0.452 0.376 0.279 CO 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162