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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