Exercises: Set B
EXERCISES: SET B
Burns Corporation is considering purchasing a new delivery truck. The truck has
many advantages over the company’s current truck (not the least of which is that it runs). The
new truck would cost $48,000. Because of the increased capacity, reduced maintenance costs,
and increased fuel economy, the new truck is expected to generate cost savings of $8,000. At
the end of 8 years the company will sell the truck for an estimated $24,000. Traditionally the
company has used a rule of thumb that a proposal should not be accepted unless it has a pay-
back period that is less than 70% of the asset’s estimated useful life. Sam Leyland, a new manager,
has suggested that the company should not rely solely on the payback approach, but should
also employ the net present value method when evaluating new projects. The company’s cost
of capital is 8%.
Compute the cash payback period and net present value of the proposed investment.
Does the project meet the company’s cash payback criteria? Does it meet the net present
value criteria for acceptance? Discuss your results.
Santos Manufacturing Company is considering three new projects, each requiring an
equipment investment of $24,000. Each project will last for 3 years and produce the following
The equipment’s salvage value is zero. Santos uses straight-line depreciation. Santos will not ac-
cept any project with a payback period over 2.5 years. Santos’s minimum required rate of return
Compute each project’s payback period, indicating the most desirable project and the least
desirable project using this method. (Round to two decimals.)
Compute the net present value of each project. Does your evaluation change? (Round to
ASU Corp. is considering purchasing one of two new diagnostic machines. Either ma-
chine would make it possible for the company to bid on jobs that it currently isn’t equipped to do.
Estimates regarding each machine are provided below.
– 0 –
– 0 –
Estimated annual cash inflows
Estimated annual cash outflows
Calculate the net present value and profitability index of each machine. Assume a 9% discount
rate.Which machine should be purchased?
Duncan Corporation is involved in the business of injection molding of plastics. It is
considering the purchase of a new computer-aided design and manufacturing machine for
$425,000. The company believes that with this new machine it will improve productivity and in-
crease quality, resulting in an increase in net annual cash flows of $115,000 for the next 5 years.
Management requires a 12% rate of return on all new investments.