Chapter 8.docx

# Chapter 8.docx - (Ignore income taxes in this problem...

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(Ignore income taxes in this problem.) Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost \$340,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost \$50,000 per year to operate and maintain, but would save \$95,000 per year in labor and other costs. The old machine can be sold now for scrap for \$30,000. The simple rate of return on the new machine is closest to: (Assume the company uses straight-line depreciation.) 3.24% 3.55% 27.94% 7.10% Annual incremental cost savings \$ 95,000 Annual incremental expenses: Annual cash operating expenses \$ 50,000 Annual depreciation (\$340,000 − \$0)/10 34,000 84,000 Annual incremental net operating income \$ 11,000 Simple rate of return = Annual incremental net operating income ÷ Initial investment = \$11,000 ÷ (\$340,000 − \$30,000) = 3.55% (Ignore income taxes in this problem.) The management of Mashiah Corporation is considering the purchase of a machine that would cost \$355,000, would last for 4 years, and would have no salvage value. The machine would reduce labor and other costs by \$115,000 per year. The company requires a minimum pretax return of 8% on all investment projects. Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables. The net present value of the proposed project is closest to: \$62,747 \$387,000 \$25,880 \$153,330 Year Now 1-4 Initial investment \$(355,000) Annual net cash flow \$ 115,000 Total cash flows (a) \$(355,000) \$ 115,000 Discount factor (8%) (b) 1.000 3.312 Present value of cash flows (a) × (b) \$(355,000) \$380,880 Net present value \$ 25,880

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(Ignore income taxes in this problem.) Overland Corporation has gathered the following data on a proposed investment project: Click here to view Exhibit 8B-1 and Exhibit 8B-2
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