QUESTION 1 Net Present Value, Annual cash Flow, Internal Rate of Return King Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently (Ignore income taxes in this problem.) Required: a) Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000, and cost savings are projected at $3,500 per year. Calculate the machine's net present value. b) How much should King Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for eight years? C) Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $31,296 and will save $6,000 annually in cash operating costs? Would you recommend to King Company to purchase Machine C? Explain. QUESTION 2 Net Present Value, Internal Rate of Return, Payback Period, Simple Rate of Retum Poulter, Inc. is considering a project that would have a ten-year life and would require a $2,000,000 investment in equipment At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net income each year as follows: Sales $2,000,000 Less: Variable $1,400,000 Expenses Contribution Margin $ 600,000 Less: Fixed Expenses $ 400,000 Net Income $ 200.000 All of the above items, except for depreciation of $200,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12% (Ignore income taxes in this problem.) Required: a) What is the project's net present value? b) What is the project's internal rate of retum? c) What is the project's payback period? d) What is the project's simple rate of return? QUESTION 3 Uncertain Future Cash Flows Viola Manufacturing Company consists of several divisions, one of which is the Transportation Division. The company has decided to dispose of this division because it no longer fits the company's long-term strategy. An offer of $9,000,000 has been received from a prospective buyer. If Viola retained the division, the company would operate the division for only nine years, after which the division would no longer be needed and would be sold for $600,000. If the company retains the division, an immediate investment of $500,000 would need to be made to update equipment to current standards. Annual net operating cash flows would be $1,805,000 if the division is retained. The company's discount rate is 12% (Ignore income taxes in this problem.) Required: Using the net present value method, determine whether Viola Manufacturing should accept or reject the offer made by the potential buyer QUESTION 4 Preference Ranking Information on four investment proposals is given below: Investment Proposal A B C D Investment required $(85,000) Present value of cash flows 199,000 Net present value $34,000 Life of the project 5 years $(200,000) $(80,000) 255,000 135,000 $50,000 $45,000 7 years 6 years $(190,000) 221,000 $51,000 6 years Required: 1. Compute the project profitability index for each investment proposal 2. Rank the proposals in terms of preference. QUESTION 5 Payback Method, Simple Rate of Retum Volkey Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are $63,000 Increased revenues Increased expenses Salary of additional operator Supplies Depreciation 12,000 Maintenance Increased net income $20.000 9,000 4,000 45,000 $18,000 (Ignore income taxes in this problem.) Required: a) What is the payback period on the new equipment? b) What is the simple rate of return on the new equipment
