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Park F Ch 5 FEE Problem

Park F Ch 5 FEE Problem - Identifying Cash Inflows and...

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Identifying Cash Inflows and Outflows 5.1 Camptown Togs, Togs, a children’s clothing manufacture, has always found payroll processing to be costly, because it must be done by a clerk so that the number of piece-goods coupons collected for each employee can be collected, and the types of tasks performed by each employee can be calculated. Recently, however, an industrial engineer has designed a system that partially automates the process by means of a scanner that reads the piece-goods coupons. Management is enthusiastic about this system because it uses some personal computer systems that were purchased recently. It is expected that this new automated system will save $40,000 per year in labor. The new system will cost about $30,000 to build and test prior to operation. It is expected that operating costs will be about $15,000 per year. The system will have a five-year useful life. The expected net salvage value of the system is estimated to be $3,000. (a) Identify the cash inflows over the life of the project. (b) Identify the cash outflows over the life of the project. (c) Determine the net cash flows over the life of the project. Answer (a) Cash inflows: (1) savings in labour, $40,000 per year, (2) Salvage value, $3,000 at year 5. (b) Cash outflows: (1) capital expenditure = $30,000 at year 0, (2) Operating costs = $15,000 per year. Estimating project cash flows: n Inflow Outflow Net flow 0 $30,000 -$30,000 1 $40,000 15,000 25,000 2 40,000 15,000 25,000 3 40,000 15,000 25,000 4 40,000 15,000 25,000 5 40,000+3,000 15,000 28,000 1
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5.2 * Refer to Problem 5.1 in answering the following questions: (a) How long does it take to recover the investment? (b) If the firm’s interest rate is 15% after taxes, what would be the discounted-payback period for this project? Answer (a) Conventional-payback period: 1.2 years (b) n Net Cash Flow Cost of Funds (15%) Cumulative Cash Flow 0 -$30,000 -$30,000 1 +$25,000 -$30,000(0.15) = -$4,500 -$9,500 2 +$25,000 -$9,500(0.15) = -$1,425 +$14,075 3 +$25,000 +$14,075(0.15) = $3,103 +$41,186 9,500 / (25,000 – 1,425) = 9,500/23,575 9,500/23,575 = .403 Discounted payback period = 1.4 years, assuming continuous payments : 2
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5.3 You are given the following financial data about a new system to be implemented at a company: investment cost at n = 0: $10,000 investment cost at n = 1: $15,000 useful life: 10 years salvage value (at the end of 11 years): $5,000 annual revenues:$12,000 per year annual expenses:$4,000 per year MARR: 10% Note: The first revenues and expenses will occur at the end of year two. (a) Determine the conventional-payback period. (b) Determine the discounted-payback period. Answer (a) n Cash Flow Cumulative Cash Flow 0 -$10,000 -$10,000 1 -15,000 -25,000 2 8,000 -17,000 3 8,000 -9,000 4 8,000 -1,000 5 8,000 7,000 It will take 4.13 years to recover the total investment. 1,000/8,000 = .125 (b) n Cash Flow Cost of Funds Cumulative CF 0 -$10,000 $0 -$10,000 1 -15,000 -1,000 -26,000 2 8,000 -2,600 -20,600 3 8,000 -2,060 -14,660 4 8,000 -1,466 -8,126 5 8,000 -813 -939 6 8,000 -94 6,967 The total investment is recovered in year 6. After 5.12 years. 939 / (8,000 - 94) =7,906 939/7,906 = .12 3
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5.4 Consider the following cash flows, for four different projects. Project’s Cash Flow n A B C D 0 -$1,500 -$4,000 -$4,500 -$3,000 1 $300 $2,000 $2,000 $5,000 2 $300 $1,500 $2,000 $3,000 3 $300 $1,500 $2,000 -$2,000 4 $300 $500 $5,000 $1,000 5 $300 $500 $5,000 $1,000 6 $300 $1,500 $2,000 7 $300 $3,000 8 $300 (a) Calculate the conventional payback period for each project.
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