Mini-Exercise 16.4

LO 7

Net present valueLakeside, Inc., is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $450,000, with an estimated salvage value of $30,000. Lakeside's cost of capital is 10%.

Required:

Calculate the net present value of the new production equipment.

Investment = (450,000)

Annual cash savings= 120,000 per year x 3.7908= 454,896

Salvage value=30,000 x 0.6209=18,627

Net present value = (450,000)+454,896+18,627= $23,523

Mini-Exercise 16.5

LO 7

Net present ratio and IRRUse the information presented for Lakeside, Inc., inMini-Exercise 16.4and your calculation of the net present value of the new production equipment.

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Required:

Calculate the present value ratio of the new production equipment, and comment on the internal rate of return of this investment relative to the cost of capital.

Present value ratio = present value of cash inflows/investment

= 473,523/450,000=1.05

Mini-Exercise 16.6

LO 9,10

Payback period and accounting rate of returnUse the information presented for Lakeside, Inc., inMini-Exercise 16.4.

Required:

Calculate the payback period and the accounting rate of return for the new production equipment.