W7Chapters21_22

# W7Chapters21_22 - Chapter 21 exercise 21-17 Riverbend...

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Chapter 21, exercise 21-17 Riverbend Company runs hardware stores in a tri-state area. Riverbend's management estima cash operating costs. The system has an expected useful life of 5 years and no terminal dispos Assume all cash flows occur at year-end except for initial investment amounts. 1. Calculate the following for the new computer system: a. Net present value Approach discounting each years cash flow separately 0 1 Net initial investment \$(160,000) 1.00 \$(160,000) 53,571 0.893 \$60,000 47,832 0.797 42,707 0.712 38,131 0.636 34,046 0.567 NPV if new system purchased \$56,287 Approach using annuity table Net initial investment \$(160,000) 1.00 \$(160,000) \$60,000 3.605 0.893 Annual cash inflow \$216,287 \$56,287 b. Payback period Payback period = Net initial investment / uniform increase in annual future cash flows Payback period = 2.67 Years c. Internal rate of return IRR = 25.41% \$(160,000) \$60,000 d. Accrual accounting rate of return based on the net initial investment (assume strai Annual Depreciation \$32,000 Increase in expected average annual after-tax operating income \$28,000 Accrual accounting rate of return = increase in expected average annual-after tax operating inco Accrual accounting rate of return = 17.50% 2. What other factors should Riverbend consider in deciding whether to purchase the ne Depreciation on the old computer system. How much it would cost to get rid of the old system. Present value of cash flow Present value of \$1 discounted at 12%

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tes that if it invests \$160,000 in a new computer system, it can save \$60,000 in annual sal value. The required rate of return is 12%. Ignore income tax issues in your answers. Net initial investment
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## This note was uploaded on 04/17/2010 for the course AC Cost Accti taught by Professor Don'trecall during the Spring '09 term at Regis University.

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W7Chapters21_22 - Chapter 21 exercise 21-17 Riverbend...

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