GNBExam14 - Part(b What is the simple rate of return on the...

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GNB 12e Practice Exam – Chapter 14 1 . The following data pertain to an investment that is being considered by the management of Newton Company: Cost of the investment $56,865 Estimated salvage value $ 3,000 Annual cost savings $ 15,000 Life of the project 5 years Discount rate 10% Part (a) What is the net present value of the proposed investment? Part (b) Should the project be accepted? Since the NPV is positive, the project would be acceptable, as follows: Years Cash Flows 10% Factor Present Value Investment in equipment Now $(56,865) 1.000 $(56,865) Annual net cash inflows 1-5 15,000 3.791 56,865 Salvage value of equipment 5 3,000 0.621 1,863 Net present value $ 1,863 2. Touro Company has gathered the following data on a proposed investment project: Cost of the investment $1,200,000 Estimated salvage value $0 Annual cost inflows $240,000 Life of the project 10 years Discount rate 10% Part (a) What is the payback period for the investment? The payback period for the investment would be determined as follows: Payback period = Required investment ÷ Annual cash inflows = $1,200,000 ÷ $240,000 = 5 years
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Unformatted text preview: Part (b) What is the simple rate of return on the investment? The simple rate of return on the investment would be determined as follows: Incremental net operating income ÷ Investment required= Simple rate of return $240,000 ÷ $1,200,000 = 20% 3. Touro Company has gathered the following data on a proposed investment project: Cost of the investment $1,200,000 Estimated salvage value $0 Annual cost inflows $ 240,000 Life of the project 10 years Discount rate 10% Part (a) What is the net present value of this investment? Part (b) Should the proposal be accepted? Why or why not? Since the NPV of the project is positive, the project would be acceptable, as follows: Years Cash Flows 10% Factor Present Value Investment in equipment Now $(1,200,000) 1.000 $(1,200,000) Annual net cash inflows 1-10 240,000 6.145 1,474,800 Net present value $ 274,800...
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