91 present value of keeping current system predicted

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91) Present value of keeping current system : Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Overhaul $(27 500) 0 1.000 $(27 500) Annual operations (63 000) 1 - 5 3.352 (211 176) Salvage value 8000 5 0.497 3976 Net present value $(234 700) Present value of new system : Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Investment $(148 000) 0 1.000 $(148 000) Salvage value, old 40 000 0 1.000 40 000 Annual operations (48 000) 1 - 5 3.352 (160 896) Salvage value 35 000 5 0.497 17 395 Net present value $(251 501) Overhauling the existing system is the most desirable by $16 801 [$(234 700) - $(251 501)]. 61
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Answer Key Testname: C18 92) a. Implement the Decision, Evaluate Performance, and Learn b. Obtain Information c. Identify Projects d. Implement the Decision, Evaluate Performance, and Learn e. Identify Projects f. Obtain Information g. Obtain Information h. Make Decisions by Choosing Among Alternatives 93) Proposal X payback = $180 000/$75 000 = 2.4 years Proposal Y Cash Savings Savings Accumulated To be Recovered Year 0 $120 000 Year 1 $50 000 $50 000 70 000 Year 2 48 000 98 000 22 000 Year 3 44 000 142 000 0 Proposal Y payback = 2 years plus $22 000/$44 000 or 2.5 years Proposal Z payback = ($190 000 + $10 000)/$80 000 = 2.5 years 94) 62
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Answer Key Testname: C18 63
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Answer Key Testname: C18 95) Present value of keeping current system : Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Overhaul $(40 000) 0 1.000 $(40 000) Annual operations (70 000) 1 - 5 2.991 (209 370) Salvage value 5000 5 0.402 2010 Net present value $(247 360) Present value of new system : Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Investment $(100 000) 0 1.000 $(100 000) Salvage value, old 20 000 0 1.000 20 000 Annual operations (40 000) 1 - 5 2.991 (119 640) Salvage value 20 000 5 0.402 8040 Net present value $(191 600) Buying the new equipment is the most desirable by $55 760 ($247 360 - $191 600). 96) TRUE 97) FALSE 98) FALSE 99) TRUE 100) FALSE 101) TRUE 102) FALSE 103) TRUE 104) TRUE 105) FALSE 106) TRUE 107) FALSE 108) FALSE 109) TRUE 110) TRUE 111) TRUE 112) TRUE 113) FALSE 114) FALSE 115) FALSE 116) FALSE 117) TRUE 118) TRUE 119) FALSE 120) TRUE 121) TRUE 122) TRUE 123) TRUE 124) TRUE 64
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Answer Key Testname: C18 125) FALSE 126) FALSE 127) FALSE 128) FALSE 129) FALSE 130) TRUE 131) TRUE 132) TRUE 133) FALSE 134) When using the net present value method (the definitive method for evaluating alternative options in capital budgeting), it is important to understand what elements are included in the rate - of - return percentage. In general, it is expected that there will always be a decline in the general purchasing power of whatever monetary units are in use (dollar, etc.). The real rate of return consists of a risk - free element as well as a business risk element but excludes the inflation element. The nominal rate of return includes all three components: the risk - free element, business risk element, and inflation element. It is acceptable to use either the real rate of return or the nominal rate of return when performing capital budgeting analysis using the net present value concepts. The main caveat is to understand which one is being used and to make sure that there is internal consistency within the analysis such that all cash flows (in and out) are using the same approach.
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