Week 3 Individual Problems

Completethe following problems in Ch 10:

• P10-2
• P10-7
• P10-14

Completethe following problems in Ch 11:

• P11-1
• P11-4
• P11-7
• P11-8

Week 3 Individual Problems P10-2 Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial investment of $14,000 and generates annual after-tax cash inflows of $3,000 for each of the next 7 years. The second machine requires an initial investment of $21,000 and provides annual cash inflow after taxes of $4,000 for 20 years. a. Determine the payback period for each machine. b. Comment on the acceptability of the machines, assuming that they are independent projects. c. Which machine should the firm accept? Why? d. Do the machines in this problem illustrate any of the weaknesses of using payback? Discuss. P10-7 Net present value: Independent projects Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. P10-14 Internal rate of return for each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable. P11-1 Classification of expenditures given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers. a. An initial lease payment of $5,000 for electronic point-of-sale cash register systems b. An outlay of $20,000 to purchase patent rights from an inventor c. An outlay of $80,000 for a major research and development program d. An $80,000 investment in a portfolio of marketable securities e. A $300 outlay for an office machine f. An outlay of $2,000 for a new machine tool g. An outlay of $240,000 for a new building h. An outlay of $1,000 for a marketing research report P11-4 Sunk costs and opportunity costs Masters Golf Products, Inc., spent 3 years and $1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,800,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $750,000 per year for the next 10 years. The company has determined that the existing line could be sold to a competitor for $250,000. a. How should the $1,000,000 in development costs be classified? b. How should the $250,000 sale price for the existing line be classified? c. Depict all the known relevant cash flows on a time line. P11-7 Book value Find the book value for each of the assets shown in the accompanying table, assuming that MACRS depreciation is being used. See Table 4.2 on page 120 for the applicable depreciation percentages. P11-8 Book value and taxes on sale of assets Troy Industries purchased a new machine 3 years ago for $80,000. It is being depreciated under MACRS with a 5-year recovery period using the percentages given in Table 4.2 on page 000. Assume a 40% tax rate. a. What is the book value of the machine? b. Calculate the firm's tax liability if it sold the machine for each of the following amounts: $100,000; $56,000; $23,200; and $15,000