Internal Rate of Return Method The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of $147,200 and annual net cash flows of $20,000 for each of the 10 years of its useful life. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places. b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal. %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 $110,000 with a $10,000 residual value and a fiveveer life. The equipment will replace one emplovee who has an average wage of $44,410 per vear. In addition. the equipment will have operating and energv costs of $11,240 per vear. 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. . v: ? Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase of $107,900 of equipment, having a four-year useful life: Net Income Net Cash Flow Year 1 $30,000 $51,000 Year 2 18,000 39,000 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% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 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 a. Assuming that the desired rate of return is 10%, 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. Present value of net cash flow Amount to be invested Net present value? Present Value Index Dip N' Dunk Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows: Ft. Collins Boulder Total present value of net cash flow $261,900 $333,840 Amount to be invested (270,000) (321,000) Net present value $(8,100) $12,840 a. Determine the present value index for each proposal. Round your answer for the present value index to two decimal places. Ft. Collins Boulder Total present value of net cash flow Amount to be invested Present value index b. Which location does your analysis support? (If both present value indexes are the same, either location will grade as correct.)Net Present Value Method for a Service Company AM Express Inc. is considering the purchase of an additional delivery vehicle for $46,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $7,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $65,000 per year for each of the next five years. A driver will cost $44,000 in 20Y1, with an expected annual salary increase of $4,000 for each year thereafter. The annual operating costs for the truck are estimated to be $2,000 per year. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 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 a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5. Annual Net Cash Flow 20Y1 20Y2 20Y3 20Y4 20Y5 b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of the present value of $1 presented above. When required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Present value of annual net cash flows Investment Net present value? Average Rate of Return The following data are accumulated by Lone Peak Inc. in evaluating two competing capital investment proposals: 3D Printer T Amount of investment $72,000 Useful life 4 years Estimated residual value 0 Estimated total income over the useful life $9,360 Determine the expected average rate of return for each proposal. If required, round your answers to one decimal place. 3D Printer Truck? Welcome Inn Hotels is considering the construction of a new hotel for $63 million. The expected life of the hotel is 8 years with no residual value. The hotel is expected to earn revenues of $19 million per year. Total expenses, including depreciation, are expected to be $13 million per year. Welcome Inn management has set a minimum acceptable rate of return of 11%. Assume straight-line depreciation. a. Determine the equal annual net cash flows from operating the hotel. Round to the nearest million dollars. million Present Value of an Annuity of $1 at Compound Interest Periods 8% 9% 10% 11% 12% 13% 14% 0.92593 0.91743 0.90909 0.90090 0.89286 0.88496 0.87719 N 1.78326 1.75911 1.73554 1.71252 1.69005 1.66810 1.64666 3 2.57710 2.53129 2.48685 2.44371 2.40183 2.36115 2.32163 3.31213 3.23972 3.16987 3.10245 3.03735 2.97447 2.91371 5 3.99271 3.88965 3.79079 3.69590 3.60478 3.51723 3.43308 4.62288 4.48592 4.35526 4.23054 4.11141 3.99755 3.88867 5.20637 5.03295 4.86842 4.71220 4.56376 4.42261 4.28830 5.74664 5.53482 5.33493 5.14612 4.96764 4.79677 4.63886 9 6.24689 5.99525 5.75902 5.53705 5.32825 5.13166 4.94637 10 6.71008 6.41766 6.14457 5.88923 5.65022 5.42624 5.21612 b. Calculate the net present value of the new hotel, using the present value of an annuity of $1 table above. Round to the nearest million dollars. If required, use the minus sign to indicate a negative net present value. Net present value of hotel project: $ million