Chapter_12_InClass_Exercises

Chapter_12_InClass_Exercises - coffee vending machines in...

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Chapter 12 – Capital Budgeting In-Class Exercises Exercise 1: Harper Company has been offered a five-year contract to provide component parts for a large manufacturer. The following data relate to the contract: Costs and revenues of the contract would be: Cost of special equipment \$160,000 Working capital required \$100,000 Relining of the equipment in three years \$30,000 Salvage value of the equipment in five years \$5,000 Annual revenues and costs: Sales revenue from parts \$750,000 Cost of parts sold \$400,000 Out-of-pocket operating costs (salaries, shipping, and so forth) \$270,000 At the end of five years the working capital of \$100,000 would be released for use elsewhere. Harper Company uses a discount rate of 10%. Given the above data, should the contract be accepted? Exercise 2:

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Myers Company wants to install an espresso bar in place of several
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Unformatted text preview: coffee vending machines in one of its stores. The company estimates that incremental annual revenues and expenses associated with the espresso bar would be: Sales \$100,000 Less variable expenses 30,000 Contribution margin 70,000 Less fixed expenses: Insurance \$ 9,000 Salaries 26,000 Depreciation 15,000 50,000 Net operating income \$ 20,000 Equipment for the espresso bar would cost \$150,000 and have a 10-year life. The old vending machines could be sold now for a \$10,000 salvage value. The company requires a payback of 5 years or less on all investments. What is the payback of the investment? Exercise 3: Refer to the data for Myers Company above. What is the simple rate of return on the espresso bar?...
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