Net Present Value Method

1. The following data are accumulated by Mad Hatter Company in evaluating the purchase of $129,800 of equipment, having a four-year useful life with no residual value:

	Net Income (Loss)		Net Cash Flows
Year 1	$34,000		$57,000
Year 2	21,000		44,000
Year 3	10,000		33,000
Year 4	(1,000)		22,000

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
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
9	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 6%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, use the minus sign to indicate a negative net present value.

Total present value of net cash flow	$fill in the blank 1
Amount to be invested	fill in the blank 2
Net present value	$fill in the blank 3

2.

Average Rate of ReturnNew Product

Arrowhead Inc. is considering an investment in new equipment that will be used to manufacture a mobile communications product. The product is expected to generate additional annual sales of 5,400 units at $309.00 per unit. The equipment has a cost of $602,600, residual value of $45,400, and an 8-year life. The equipment only can be used to manufacture the product. The cost to manufacture the product is shown next.

Cost per unit:
	Direct labor		$53.00
	Direct materials		207.00
	Factory overhead (including depreciation)		35.20
		Total cost per unit	$295.20

Determine the average rate of return on the equipment. ___________

3.

Average Rate of Return

The following data are accumulated by GreenApple Motors Inc. evaluating two competing capital investment proposals:

	Testing Equipment		Diagnostic Software
Amount of investment	$72,000		$80,000
Useful life	4 years		5 years
Estimated residual value	$0		$0
Estimated total income over the useful life	$11,520		$23,000

Determine the expected average rate of return for each proposal. If required, round to one decimal place.

Testing Equipment	%
Diagnostic Software	%

4.

Present Value Index

Kentucky Grill has computed the net present value for capital expenditures for the Somerset and Whitley City locations using the net present value method. Relevant data related to the computation are as follows:

	Somerset		Whitley City
Total present value of net cash flow	$255,780		$320,330
Amount to be invested	261,000		311,000

a. Determine the present value index for each proposal. Round to two decimal places.

	Present Value Index
Somerset Location
Whitley City Location

5. Sager Industries is considering an investment in equipment that will replace direct labor. The equipment has a cost of $103,000 with a $9,000 residual value and a five-year life. The equipment will replace three employees who have average total wages of $35,480 per year. In addition, the equipment will have operating and energy costs of $9,960 per year.

Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. ____________

6.

Cash Payback Period, Net Present Value Method, and Analysis

GWH Publications Inc. is considering two new magazine products. The estimated net cash flows from each product are as follows:

Year	Primitive Camping		Lakeside Fishing
1	$132,000		$110,000
2	108,000		130,000
3	93,000		89,000
4	84,000		62,000
5	27,000		53,000
Total	$444,000		$444,000

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
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
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Each product requires an investment of $240,000. A rate of 15% has been selected for the net present value analysis.

Required:

1a. Compute the cash payback period for each project.

	Cash Payback Period
Primitive Camping	2 years
Lakeside Fishing	2 years

1b. Compute the net present value. Use the present value of $1 table presented above. If required, use the minus sign to indicate a negative net present value.

	Primitive Camping		Lakeside Fishing
Present value of net cash flow total
Amount to be invested
Net present value