Question
OHara Co. is interested in acquiring a new machine that costs $92,000. The machine will last 6 years and provide a cost savings of $23,000
OHara Co. is interested in acquiring a new machine that costs $92,000. The machine will last 6 years and provide a cost savings of $23,000 a year. The salvage value of the machine is $10,000. The required rate of return is 12%.
Compute the projects net present value.
The Hilltop Corporation is considering (as of 1/1/08) the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through 2011. If Hilltop decides to replace the old machine, Baker Company has offered to purchase it for $50,000 on the replacement date. The disposal value of the old machine would be zero at the end of 2011.
If the replacement occurs, a new machine would be acquired from Busby Industries on January 2, 2008. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $150,000 would be generated through 2011, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of 2011.
If Hilltop requires investments to earn an 8 percent return, the net present value for replacing the old machine with the new machine is
ACCOUNTING RATE OF RETURN (ARR)
A company is contemplating the purchase of a new machine that will cost $31,500 and generate additional revenues of $23,250 a year. Additional costs, other than depreciation, will be $12,000 a year. The estimated life of the machine will be 7 years, and there will be no salvage value.
What is the ARR?
Lamar Company is studying a project that would have an eight year life and require a $1,600,000 investment in equipment. At the end of the eight years, the project would terminate and the equipment would have no salvage value. Below are estimates of the annual revenues and costs associated with the project for the eight-year period.
Estimate annual sales revenue $3M
Estimated annual variable costs, 60% of sales revenue
Estimated annual fixed costs $700,000
The straight-line depreciation method would be used.
The company requires an ARR of at least 18% on all investments.
What is the ARR for this investment?
PAYBACK PERIOD AND ACCOUNTING RATE OF RETURN
More Toppings, Inc. is considering the purchase of a new oven in their pizzaria. It will cost $105,000 and generate annual cash inflows of $15,000.
What is the payback period.
Referring to problem 2, the payback period to replace the old machine with the new machine is
a. 3.3 years.
b. 3.0 years.
c. 4.0 years.
d. 2.5 years
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