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Unformatted text preview: Chapter 12 Capital Budgeting Decisions Exercise 125 (15 minutes) 1. The payback period is: Investment required Payback period = Annual net cash inflow ¥432,000 = = 4.8 years ¥90,000 No, the equipment would not be purchased because the payback period (4.8 years) exceeds the company’s maximum payback time (4.0 years). 2. The simple rate of return would be computed as follows: Annual cost savings................................................ ¥90,000 Less annual depreciation (¥432,000 ÷ 12 years)..... 36,00 Annual incremental net operating income............... ¥54 ,000 Annual incremental net operating income Simple rate of return = Initial investment ¥54,000 = = 12.5% ¥432,000 No, the equipment would not be purchased because its 12.5% rate of return is less than the company’s 14% required rate of return. 121 Exercise 126 (10 minutes) Item Year(s) Amount of Cash Flows 18% Factor Present Value of Cash Flows Project X: Initial investment... Now $(35,000) 1.000 $(35,000) Annual cash inflow 110 $9,000 4.494 40,446 Net present value.. $ 5,446 Project Y: Initial investment... Now $(35,000) 1.000 $(35,000) Single cash inflow. 10 $150,000 0.191 28,650 Net present value.. $( 6,350 ) Project X should be selected. Project Y does not provide the required 18% return, as shown by its negative net present value. 122 Exercise 129 (15 minutes) 1. Computation of the annual cash inflow associated with the new pinball machines: Net operating income.............................................. $40,000 Add noncash deduction for depreciation................. 35,000 Annual net cash inflow............................................. $75,000 The payback computation would be: Investment required Payback period = Annual net cash inflow $300,000 = = 4.0 years $75,000 per year Yes, the pinball machines would be purchased. The payback period is less than the maximum 5 years required by the company. 2. The simple rate of return would be: Annual incremental net income Simple rate = of return Initial investment $40,000 = = 13.3% $300,000 Yes, the pinball machines would be purchased. The 13.3% return exceeds 12%....
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This note was uploaded on 02/02/2011 for the course ACCT 226 taught by Professor Smith during the Fall '10 term at South Carolina.
 Fall '10
 Smith

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