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1. Net Present Value Method [LO1] The management of Kunkel Company is considering the purchase of a $40,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's eight-year useful life, it will have zero scrap value. The company's required rate of return is 12%. (Ignore income taxes.) To determine the appropriate discount factor(s) using tables, click here to view Exhibit 13B-1 and Exhibit 13B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem. Requirement 1: Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Net present value $ Requirement 2: What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Omit the "$" sign in your response.) Net cash flow $ Internal Rate of Return [LO2] [The following information applies to the questions displayed below.] Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. (Ignore income taxes.) To determine the appropriate discount factor(s) using tables, click here to view Exhibit 13B-1 and Exhibit 13B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem. 2. Requirement 1: What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? (Omit the "$" sign in your response.) Total annual cash inflows $ 3. Requirement 2: Find the internal rate of return promised by the new machine. (Round your answer to the nearest whole percent. Omit the "%" sign in your response.) Internal rate of return check my workeBook Linkreferences % 4. Requirement 3: In addition to the data given previously, assume that the machine will have a $9,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Hint: You may find it helpful to use the trial-and-error process; find the discount rate that will cause the net present value to be closest to zero.) (Round your answer to the nearest whole percent. Omit the "%" sign in your response.) Internal rate of return % Preference Ranking [LO4] [The following information applies to the questions displayed below.] Information on four investment proposals is given below: A Investment required Present value of cash inflows Net present value Life of the project Investment Proposal B C D $(90,000) $(100,000) $(70,000) $(120,000) 126,000 138,000 105,000 160,000 $36,000 $38,000 $35,000 $40,000 5 years 7 years 6 years 6 years references 5. Requirement 1: Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.) Proposal Number A B C D Project Profitability Index 6. Requirement 2: Rank the proposals in terms of preference. DC BA CAB D ABCD B CAD Payback Method [LO5] [The following information applies to the questions displayed below.] The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment 1 2 3 4 5 6 7 8 9 10 $15,000 $8,000 Cash Inflow $1,000 $2,000 $2,500 $4,000 $5,000 $6,000 $5,000 $4,000 $3,000 $2,000 7. Requirement 1: Determine the payback period of the investment. (Round your answer to 1 decimal place.) Payback period years 8. Requirement 2: Would the payback period be affected if the cash inflow in the last year were several times as large? Yes No 9. Simple Rate of Return Method [LO6] The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $120,000. The machine would replace an old piece of equipment that costs $30,000 per year to operate. The new machine would cost $12,000 per year to operate. The old machine currently in use could be sold now for a scrap value of $40,000. The new machine would have a useful life of 10 years with no salvage value. Required: Compute the simple rate of return on the new automated bottling machine. (Round your answer to 1 decimal place. Omit the "%" sign in your response.) Simple rate of return % SOLUTION LO1: Year Cash Flows 0 1 2 3 4 5 6 7 8 PVF @ 12% Present Value $(40,000.00) $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 $(40,000.00) $6,250.00 $5,580.36 $4,982.46 $4,448.63 $3,971.99 $3,546.42 $3,166.44 $2,827.18 Net Present Value $(5,226.52) Net Cash Flow = Cash Inflows - Cash Outflows Net Cash Flow = ($7,000 * 8) - $40,000 Net Cash Flow $16,000.00 SOLUTION LO2: Annual Cash Inflows = Cost Savings + Increased Sales Annual Cash Inflows = $3,800 + (1,000 * $1.20) Annual Cash Inflows Year 0 1 2 3 4 5 6 $5,000.00 Cash Flows $(18,600.00) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 Using excel formula, Internal Rate of Return Year 0 1 2 3 4 5 6 15.64% Cash Flows $(18,600.00) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $14,125.00 Using excel formula, Internal Rate of Return 22.00% SOLUTION LO4: Profitability Index = Present Value of Cash Inflows / Present Value of Cash Outflows Particulars A Present Value of Cash Outflows Present Value of Cash Inflows B C D $90,000.00 $126,000.00 $100,000.00 $138,000.00 $70,000.00 $105,000.00 $120,000.00 $160,000.00 1.40 II 1.38 III 1.50 I 1.33 IV Cash Net Cash Flows Inflow -$14,000.00 $1,000.00 -$6,000.00 $2,000.00 $2,500.00 $2,500.00 $4,000.00 $4,000.00 $5,000.00 $5,000.00 $6,000.00 $6,000.00 $5,000.00 $5,000.00 $4,000.00 $4,000.00 $3,000.00 $3,000.00 $2,000.00 $2,000.00 Cumulative Cash Flows -$14,000.00 -$20,000.00 -$17,500.00 -$13,500.00 -$8,500.00 -$2,500.00 $2,500.00 $6,500.00 $9,500.00 $11,500.00 Profitability Index Ranking SOLUTION LO5: Year Investment 1 2 3 4 5 6 7 8 9 10 $(15,000.00) $(8,000.00) Pay Back Period = 6 years + ($2,500 / $5,000) Pay Back Period 6.5 SOLUTION LO6: Net Investment = $120,000 - $40,000 Net Investment $80,000.00 Cash Inflows = $30,000 - $12,000 - ($120,000 / 10) Cash Inflows $6,000.00 Simple Rate of Return = Cash Inflows / Net Investment Simple Rate of Return = $18,000 / $80,000 Simple Rate of Return 7.5% SOLUTION LO1: Year Cash Flows 0 1 2 3 4 5 6 7 8 PVF @ 12% Present Value $(40,000.00) $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 $(40,000.00) $6,250.00 $5,580.36 $4,982.46 $4,448.63 $3,971.99 $3,546.42 $3,166.44 $2,827.18 Net Present Value $(5,226.52) Net Cash Flow = Cash Inflows - Cash Outflows Net Cash Flow = ($7,000 * 8) - $40,000 Net Cash Flow $16,000.00 SOLUTION LO2: Annual Cash Inflows = Cost Savings + Increased Sales Annual Cash Inflows = $3,800 + (1,000 * $1.20) Annual Cash Inflows Year 0 1 2 3 4 5 6 $5,000.00 Cash Flows $(18,600.00) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 Using excel formula, Internal Rate of Return Year 0 1 2 3 4 5 6 15.64% Cash Flows $(18,600.00) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $14,125.00 Using excel formula, Internal Rate of Return 22.00% SOLUTION LO4: Profitability Index = Present Value of Cash Inflows / Present Value of Cash Outflows Particulars A Present Value of Cash Outflows Present Value of Cash Inflows B C D $90,000.00 $126,000.00 $100,000.00 $138,000.00 $70,000.00 $105,000.00 $120,000.00 $160,000.00 1.40 II 1.38 III 1.50 I 1.33 IV Cash Net Cash Flows Inflow -$14,000.00 $1,000.00 -$6,000.00 $2,000.00 $2,500.00 $2,500.00 $4,000.00 $4,000.00 $5,000.00 $5,000.00 $6,000.00 $6,000.00 $5,000.00 $5,000.00 $4,000.00 $4,000.00 $3,000.00 $3,000.00 $2,000.00 $2,000.00 Cumulative Cash Flows -$14,000.00 -$20,000.00 -$17,500.00 -$13,500.00 -$8,500.00 -$2,500.00 $2,500.00 $6,500.00 $9,500.00 $11,500.00 Profitability Index Ranking SOLUTION LO5: Year Investment 1 2 3 4 5 6 7 8 9 10 $(15,000.00) $(8,000.00) Pay Back Period = 6 years + ($2,500 / $5,000) Pay Back Period 6.5 SOLUTION LO6: Net Investment = $120,000 - $40,000 Net Investment $80,000.00 Cash Inflows = $30,000 - $12,000 Cash Inflows $18,000.00 Simple Rate of Return = Cash Inflows / Net Investment Simple Rate of Return = $18,000 / $80,000 Simple Rate of Return 22.5% \fSOLUTION LO1: Year Cash Flows 0 1 2 3 4 5 6 7 8 PVF @ 12% Present Value $(40,000.00) $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 $7,000.00 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 $(40,000.00) $6,250.00 $5,580.36 $4,982.46 $4,448.63 $3,971.99 $3,546.42 $3,166.44 $2,827.18 Net Present Value $(5,226.52) Net Cash Flow = Cash Inflows - Cash Outflows Net Cash Flow = ($7,000 * 8) - $40,000 Net Cash Flow $16,000.00 SOLUTION LO2: Annual Cash Inflows = Cost Savings + Increased Sales Annual Cash Inflows = $3,800 + (1,000 * $1.20) Annual Cash Inflows Year 0 1 2 3 4 5 6 $5,000.00 Cash Flows $(18,600.00) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 Using excel formula, Internal Rate of Return Year 0 1 2 3 4 5 6 15.64% Cash Flows $(18,600.00) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $14,125.00 Using excel formula, Internal Rate of Return 22.00% SOLUTION LO4: Profitability Index = Present Value of Cash Inflows / Present Value of Cash Outflows Particulars A Present Value of Cash Outflows Present Value of Cash Inflows B C D $90,000.00 $126,000.00 $100,000.00 $138,000.00 $70,000.00 $105,000.00 $120,000.00 $160,000.00 1.40 II 1.38 III 1.50 I 1.33 IV Cash Net Cash Flows Inflow -$14,000.00 $1,000.00 -$6,000.00 $2,000.00 $2,500.00 $2,500.00 $4,000.00 $4,000.00 $5,000.00 $5,000.00 $6,000.00 $6,000.00 $5,000.00 $5,000.00 $4,000.00 $4,000.00 $3,000.00 $3,000.00 $2,000.00 $2,000.00 Cumulative Cash Flows -$14,000.00 -$20,000.00 -$17,500.00 -$13,500.00 -$8,500.00 -$2,500.00 $2,500.00 $6,500.00 $9,500.00 $11,500.00 Profitability Index Ranking SOLUTION LO5: Year Investment 1 2 3 4 5 6 7 8 9 10 $(15,000.00) $(8,000.00) Pay Back Period = 6 years + ($2,500 / $5,000) Pay Back Period 6.5 SOLUTION LO6: Net Investment = $120,000 - $40,000 Net Investment $80,000.00 Cash Inflows = $30,000 - $12,000 - ($120,000 / 10) Cash Inflows $6,000.00 Simple Rate of Return = Cash Inflows / Net Investment Simple Rate of Return = $18,000 / $80,000 Simple Rate of Return 7.5%