increase production by 6,000 boxes of chocolates per year. The company realizes a bution margin of $1.50 per box. A 20% rate of return is required on all investments. Required: 1. What are the annual net cash inflows that will be provided by the new dipping machine? compute the new machine's net present value. Round all dollar amounts to the nearest whole dollar PROBLEM 8-23 Comprehensive Problem [LO 8-1, LO 8-2, LO 8-3, LO 8-5, LO 8-6] Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his divi- sion's return on investment (ROI), which has exceeded 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $170,000 $380,000 Initial investment: Cost of equipment (zero salvage value) ...... Annual revenues and costs: Sales revenues .... Variable expenses ........................ Depreciation expense ............. Fixed out-of-pocket operating costs ......... $250,000 $120,000 $34.000 $70,000 $350,000 $170,000 $76,000 $50,000 The company's discount rate is 16%. Required: 1. Calculate the payback period for each product. Calculate the net present value for each product. Calculate the internal rate of return for each product Calculate the project profitability index for each product. 5. Calculate the simple rate of return for each product 6. Which of the two products should Lou's division pursue? Why? PROBLEM 8-24 Simple Rate of Return; Payback; Internal Rate of Return (LO 8-1, LO 8-3, LO 8-6] The Elberta Fruit Farm of Ontario has always hired transient workers to pick its annual cherry crop. Francie Wright, the farm manager, has just received information on a cherry picking machine that is being purchased by many fruit farms. The machine is a motorized device that Shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Me Wright has gathered the following information to decide whether a cherry picker would be a profitable investment for the Elberta Fruit Farm: Currently, the farm is paying an average of $40,000 per year to transient workers to pick the cherries. The cherry picker would cost $94,500, and it would have an estimated 12-year useful life. The WK 4 P8-23 ALL YELLOW HIGHLIGHTED CELLS REQUIRE DATA INPUT FORMULAS DO NOT KEY OVER Requirement 1. Product A Product B Sales Revenues: Variable Expenses: Fixed Out-of-pocket operating costs: Annual Net Cash inflows: $ uu Product A Product B Investment required (A): Annual Net Cash Inflow (B): Payback Period (A/B): #DIV/0! #DIV/0! Requirement 2. Net Present Values: Product A Now - $ . $ - $ $ $ - - Purchase of Equipment: Sales: Variable Expenses: Fixed out-of-pocket expenses: Total Cash Flows (A): Discount Factor (B): Present Value (A x B): Net Present Value: . . $ . $ $ $ 1.000 - $ . S $ $ . Net Present Values: Product B Now Purchase of Equipment: Sales: $ . $ . . - - - Variable Expenses: Fixed out-of-pocket expenses: Total Cash Flows (A): Discount Factor (B): Present Value (A x B): Net Present Value: S $ 5 - - . S $ $ - - S $ $ - - . $ $ S .000 Requirement 3. Product A Product B Investment required (A): Annual Net Cash Inflow (B): Factor of the Internal Rate of Return (A/B): - - S $ #DIV/0! #DIV/0! Requirement 4. Product A Product B Net Present Value (A): Investment Required (B): Project Profitability Index (A/B): #DIV/01 #DIV/0! Requirement 5. Product A Product B Annual Net Cash Inflow: Depreciation Expense: Annual Incramental Net Operating Income: Product A Product B Annual Incramental Net Operating Income (A): Initial Investment (B): $ $
