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Unformatted text preview: 1 Question: The Petty Company has analyzed an investment opportunity costing $270,000, and determined that the net present value is $1,42
the investment would generate cash inflows of $50,000 a year for eight years, and used a discount rate of 10%. What was the salvage value
opportunity? Answer:
Given Information
Present value of annuity of equal annual net cash
inflows at 10% (50000 x 5.335)
Residual Value in year 8 at 10% (? x 0.467)
Investment
Net Present Value Note: Present value tables are needed.
$4,670
$10,000
$6,960
$3,919 3 Question: Pearl Manufacturing is considering an investment in equipment costing $660,000. The equipment will be depreciated on the straigh
residual value of $120,000. The investment is expected to generate annual net cash inflows of $135,000 for 8 years. Using the accounting ra
annual operating income that must be generated from this investment in order to achieve a 14% accounting rate of return? I don't get the answer that it says is correct, but if I have d
14%
=
Average annual operating incom
Average amount invested
14%
=
Average annual operating incom
(Cost of equipment  Residual v
14%
=
Average annual operating incom
(660000  120000)/2
14%
=
Average annual operating incom
270000
14% x 270000
=
Average annual operating incom
37800
=
Average annual operating incom $18,900
$37,800
$54,600
$92,400 4
Question: Simms Manufacturing is considering two alternative investment proposals with the following data Investment
Useful life Proposal X
$620,000
8 years Proposal Y
$400,000
8 years Estimated annual net cash inflows for 8 years $130,000
Residual value
$60,000 $80,000
$0 Depreciation method Straightline Straightline Required rate of return 14% 10% Note: Present value tables are needed.
What is the net present value of Proposal X? Answer:
$3,070 positive
$4,130 positive Present value of annuity of equal annual net cash
inflows at 14% (130000 x 4.639) $3,070 negative
$4,130 negative Residual Value in year 8 at 14% (60000 x 0.351)
Investment
Net Present Value 2 Question: McCartney Corporation is contemplating an investment in new machinery costing $300,000. The machine will be depreciated on a
and is expected to increase revenues by $284,000, and cash operating expenses by $220,000 per year. How much would the machine’s salv
achieve an accounting rate of return of 8%?
$40,000
$50,000
$100,000
$75,000 There has to be a better way to do this question but here is what I did on my test.
ARR = Average annual operating income from an asset / Average amount inveted in an asset
So: Average annual operating income =
Total net cash inflow (284000 x 5)
Less: Total depreciation (300000  salvage)
Less: Total Expenses (220000 x 5)
OI (142000  (300000  x)  1100000)
divided: by life of asset
Average annual operating income
*** x=salvage value 1420000
(300000  x)
(1,100,000)
20000 + x
5 years
(20000 + x) /5 Plug it into equation:
ARR
8% I have no other idea how to
am sure there is probably 8%(1500000  5x)
120000  0.4x d that the net present value is $1,420. Petty’s management estimated that
f 10%. What was the salvage value associated with the investment Therefore: of equal annual net cash
10% (50000 x 5.335)
8 at 10% (? x 0.467) 266,750
(270,000)
1,420 1420 =
1420 =
4670 =
4670 / 0.467 =
$10,000.00 = 266750 + 0.467x  270000
0.467x  3250
0.467x
x
x ent will be depreciated on the straightline basis over an eightyear period with an estimated
for 8 years. Using the accounting rateofreturn model, what is the minimum average
ing rate of return? it says is correct, but if I have done my calculations correct, this is the answer
Average annual operating income
Average amount invested
Average annual operating income
(Cost of equipment  Residual value)/2
Average annual operating income
(660000  120000)/2
Average annual operating income
Average annual operating income
Average annual operating income of equal annual net cash
14% (130000 x 4.639) 603,070 The answer the test says is right will give an ARR of
54600
270000
=
0.2
=
20%
= 8 at 14% (60000 x 0.351)
21,060
(620,000)
4,130 e machine will be depreciated on a straightline basis over a fiveyear life
How much would the machine’s salvage value need to be in order to ted in an asset
Plug it into equation:
=
Average annual operating Income
Average amount invested in asset
=
(20000  x) / 5
(300000  x) / 2
I have no other idea how to do this except to use algebra to finish the calculations. I
am sure there is probably an easier way to do this question  I just don't know it. ALGEBRA CALCULATIONS
ARR
=
Average annual operating Income
Average amount invested in asset
8%
=
(20000 + x) / 5
(300000  x) / 2
8%
=
20000+x
2
*
5
300000x
8%
=
40000 + 2x
1500000  5x
8%(1500000  5x)
=
40000 + 2x
120000  0.4x
=
40000 + 2x
1.6x
=
80000
x
=
50000 is right will give an ARR of ...
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This note was uploaded on 09/11/2011 for the course TERM 1 taught by Professor Smith during the Spring '11 term at FIT.
 Spring '11
 smith
 Business, Opportunity Cost, Net Present Value

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