quiz 20 help

quiz 20 help - 1 Question: The Petty Company has analyzed...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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 Straight-line Straight-line 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 straight-line basis over an eight-year period with an estimated for 8 years. Using the accounting rate-of-return 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 straight-line basis over a five-year 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 300000-x 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 ...
View Full Document

This note was uploaded on 09/11/2011 for the course TERM 1 taught by Professor Smith during the Spring '11 term at FIT.

Ask a homework question - tutors are online