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Chapter 12 Supplemental B Exercises

# Chapter 12 Supplemental B Exercises - Exercises Set B o l l...

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E12-1B Allen Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost \$48,000. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of \$8,000. At the end of 8 years the company will sell the truck for an esti- mated \$20,000. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 70% of the asset’s esti- mated useful life. Achin Ceban, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 9%. Instructions (a) Compute the cash payback period and net present value of the proposed investment. (b) Does the project meet the company’s cash payback criteria? Does it meet the net present value criteria for acceptance? Discuss your results. E12-2B Kogama Manufacturing Company is considering three new projects, each requiring an equipment investment of \$25,000. Each project will last for 3 years and pro- duce the following cash inflows. Year AA BB CC 1 \$ 7,000 \$ 9,600 \$13,000 2 9,000 9,600 9,000 3 12,000 9,600 11,000 Total \$28,000 \$28,800 \$33,000 The equipment’s salvage value is zero. Kogama uses straight-line depreciation. Kogama will not accept any project with a payback period over 2.5 years. Kogama’s minimum required rate of return is 12%. Instructions (a) Compute each project’s payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals.) (b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.) E12-3B SWC Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.

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