Chapter 11 Problems

I. vengeance expiration computation even capital full stops deem the payback period for to each one of the following two start out investitures (round the payback period to two decimals) 1. A untried operating organisation for an existing auto is expected to appeal $260,000 and have a useful vivification of five stratums. The system yields an incremental subsequentlyward-tax income of $75,000 each year after deducting its straight-line derogation. The predicted pull through think of of the system is $10,000. Payback period=Cost of investment funds/ yearbook enlighten capital flow =$260,000/ $125,000 =2. 08 geezerhood Annual depreciation= $260,000 -$10,000 / 5 = $50,000 Annual after tax income $75,000 Depreciation 50,000 Annual net cash flow$125,000 2. A machine costs $190,000, has a $10,000 carry through quantify, is expected to last nine years, and will generate an after-tax income of $30,000 per year after straight-line depreciation. Payback period=Cost of i nvestment/ Annual net cash flow =$190,000/ $50,000 =3. 8 years Annual depreciation= $190,000 -$10,000 / 9 = $20,000 Annual after tax income $30,000 + Depreciation 20,000 Annual net cash flow$50,000 II. Payback period computation uneven cash flows Wenro Company is considering the corrupt of an asset for $90,000. It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year. Compute the payback period for this investment. Part of year= Amount paid back in year 4/ displace cash flows in year 4 = $10,000 / $60,000 = 0. 167 Payback period=3 + 0. 167 = 3. 1367 years = 3yrs 2 mos. III. Accounting Rate of overhaul A machine costs $500,000 and is expected to yield an after-tax net income of $15,000 each year. Management predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machines accounting rate of return. Average investment=$500,000 + $100,000 / 2 $300,000 Accounting rate of return=$15,000 / $300,000 = 5% IV. Computing Net take Value K2B Company is considering the purchase of equipment that would allow the phoner to minimal brain dysfunction a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipments product each year. The expected annual income relate to this equipment follows. K2B concludes that the investment must earn at least an 8% return. Compute the net present value of this investment. Round the net present value to the nearest dollar. ) Net cash flows from net income 1. Payback period=$240,000 / $44,500 = 5. 39 years 2. Accounting rate of return=$24,500 / $120,000 = 20. 42% V. Net Present Value interstate highway Manufacturing is considering either replacing one of its middle-aged machines with a new machine or having the old machine overhauled. Information or so the two secondarys follows. Management requires a 10% rate of return on its investments. Alternative 1 Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. 1.Determine the net present value of alternative 1. Keep the old machine and have it overhauled Alternative 2 grass the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more products being produced and sold. 2. Determine the net present value of alternative 2. Sell the old machine and buy a new one 3. Which alternative do you recommend that management select? Explain. Interstate should keep the old machine and overhaul it. The cost savings and excess revenue generated on the new machine are not full to overcome the high initial cost of the new machine.