This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ent required rate of return of 20%? Show computations, and assume no and they taxes. Answer: Present value of keeping current system: Predicted Cash Flows Year(s) PV Factor $(40,000) 0 1.000 (70,000) 15 2.991 5,000 5 0.402 PV of Cash Flows Overhaul Annual operations Salvage value Net present value Present value of new system: Investment Salvage value, old Annual operations Salvage value Net present value Buying the new equipment is the most desirable by $55,760 ($247,360 $191,600). Predicted Cash Flows Year(s) PV Factor $(100,000) 0 1.000 20,000 0 1.000 (40,000) 15 2.991 20,000 5 0.402 PV of Cash Flows Diff: 3 Terms: net present value (NPV) method Objective: 3 AACSB: Analytical skills 112) Maremou follows: nt Tire Company Current Machine New Machine needs to Purchase Price, New $112,500 $148,000 overhaul Current book value 33,500 its auto Overhaul needed now 27,500 lift system Annual cash operating costs 63,000 48,000 or buy a Current salvage value 40,000 new one. Salvage value in five years 8,000 35,000 The facts have been Required: gathered, and they Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no are as taxes. Answer: Present value of keeping current system: Predicted Cash Flows Year(s) PV Factor $(27,500) 0 1.000 (63,000) 15 3.352 8,000 5 0.497 PV of Cash Flows Overhaul Annual operations Salvage value Net present value Present value of new system: Investment Salvage value, old Annual operations Salvage value Net present value Overhauling the existing system is the most desirable by $16,801 [$(234,700)  $(251,501)]. Predicted Cash Flows Year(s) PV Factor $(148,000) 0 1.000 40,000 0 1.000 (48,000) 15 3,352 35,000 5 0.497 PV of Cash Flows Diff: 3 Terms: net present value (NPV) method Objective: 3 AACSB: Analytical skills 113) ABC Boat improved model. The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six Company years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40,000. is interested The n...
View
Full
Document
This note was uploaded on 09/18/2010 for the course ACCT 424 taught by Professor All during the Spring '10 term at DeVry Long Beach.
 Spring '10
 ALL
 Accounting, Cost Accounting, The Bible

Click to edit the document details