Problem 1

Manus Company is considering the purchase of a new high-speed machine for its factory. The machine will cost $170,000 and will save the company $42,000 per year in cash operating costs. The machine has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 11%.

Required: 1) Compute the net present value of this investment.

2) Using net present value as the only decision tool, is this an acceptable project? Why or why not?

Problem 2

Car City is divided into three divisions: new car sales (NCS), used car sales (UCS), and parts and service (PAS). Each division is supervised by a division manager. The three division managers report to the general manager. Each division is subdivided into different departments managed by a department manager. For example, the PAS division has a parts department manager and a service department manager and NCS has a department manager for auto sales and a department manager for truck sales. The following items were contained in the company's most recent responsibility report:

a) allocated utility cost for NCS division

b)cost to rent vacant lot for storage of new vehicles

c)part revenue for the PAS division

d) parts shipping. delivery costs

e)salary of the general manager

f)salary of the part department manager

g)salary of the PAS division manager

h)salary of the UCS division manager

i)sales commissions of UCS sales personnel

j)service revenue for the PAS division

k)training costs for mechanics in PAS division

l)Warranty repair costs

Required: Identify the items that are likely considered to be controllable by the New Car Sales division.

Problem 3

Shilling Company is evaluating two different capital investments, Project X and Y. Either X or Y would cost $210,000, and the company cannot afford to do both. The company expects that Project X would provide net cash inflows of $62,000 per year for 5 years. For Project Y, the net cash inflows are expected to be as follows:

Years Cash inflows from Project Y

1 $44,000

2 $48,000

3 $60,000

4 $76,000

5 $80,000

Total: 308,000

Shiling's cost of capital is 10%

Required:

1) Calculate the present value index for Project X and for Project Y. Round your answer to three decimal places.

Project X _________________ Project Y _________________

2) Indicate whether each of the projects is an acceptable investment

Project X _________________ Project Y _________________

3) Based on present value index, which of the two projects should Shilling implement?