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Unformatted text preview: ew machine costs $160,000 and has a predicted salvage value of $24,000 at the end of six years. If purchased, the in new machine will allow cash savings of $40,000 for each of the first three years, and $20,000 for each year of its replacing remaining six-year life. a molding machine Required: with a new What is the net present value of purchasing the new machine if the company has a required rate of return of 14%? Answer: Initial investment Salvage of old
Diff: 3 Terms: Predicted Cash Flows Year(s) $(160,000) 0 20,000 0 PV Factor 1.000 1.000 PV of Cash Flows $(160,000) Annual o Annual o Save by n Salvage o Net pre net present value (NPV) method, required rate of return (RRR) Objective: 3 AACSB: Analytical skills 114) Supply the missing data for each of the following proposals: Initial investment Annual net cash inflow Life, in years Salvage value Payback period in years Internal rate of return Answer: Proposal A (a) $60,000 10 $0 (b) 12% Proposal B $62,900 (c) 6 $10,000 (d) 24% Proposal C $226,000 (e) 10 $0 5.65 (f) a. Annual cash inflow Present value factor for 10 years Initial investment b. Payback period = $339,000/$60,000 = 5.65 years c. Initial investment PV of salvage value ($10,000 × 0.275) Net PV of annual net cash inflow Annual cash inflow = $60,150/3.020 = $19,917.22 d. Payback = $62,900/$19,917.22 = 3.158 e. Annual net cash inflow = $226,000/5.650 = $40,000 f. PV factor for 10 years = $226,000/$40,000 = 5.650 Look up value 5.650 in PV of annuity table under 10 years and the internal rate of return is 12%. $ 60,000 × 5.650 $339,000 $62,900 (2,750) $60,150 Diff: 3 Terms: payback, internal rate-of-return (IRR) method Objective: 3, 4 AACSB: Analytical skills 115) Terrain Vehicle has received three proposals for its new vehiclepainting machine. Informati on on each proposal is as follows: Initial investment in equipment Working capital needed Annual cash saved by operations: Year 1 Year 2 Year 3 Year 4 Salvage value end of year: Year 1 Year 2 Year 3 Year 4 Working capital return...
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