Annual cash present value factor for 10 years 5650

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Annual cash inflow $60 000 Present value factor for 10 years × 5.650 Initial investment $339 000 b. Payback period = $339 000/$60 000 = 5.65 years c. Initial investment $62 900 PV of salvage value ($10 000 × 0.275) (2750) Net PV of annual net cash inflow $60 150 Annual cash inflow = $60 150/3.020 = $19 917.22 d. Payback = $62 900/$19 917.22 = 3.158 e. Annual net cash inflow = $226 000/5.650 = $40 000 f. PV factor for 10 years = $226 000/$40 000 = 5.650 Look up value 5.650 in PV of annuity table under 10 years and the internal rate of return is 12%. Explanation: 37
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91) Maremount Tyre Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows: Current Machine New Machine Purchase Price, New $112 500 $148 000 Current book value 33 500 Overhaul needed now 27 500 Annual cash operating costs 63 000 48 000 Current salvage value 40 000 Salvage value in five years 8000 35 000 Required: Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no taxes. 91) Answer: 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)]. Explanation: 38
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92) Match each one of the examples below with one of the stages of the capital budgeting decision model. Stages : 1. Identify Projects 2. Obtain Information 3. Make Predictions 4. Make Decisions by Choosing Among Alternatives 5. Implement the Decision, Evaluate Performance, and Learn ________ a. Issuing shares for the funds to purchase new equipment ________ b. Learning that to effectively operate Machine #8 only takes 15 minutes ________ c. The need to reduce the costs to process the vegetables used in producing goulash ________ d. Monitoring the costs to operate a new machine ________ e. Percentage of defective merchandise is considered too high ________ f. Will introducing the new product substantially upgrade our image as a producer of quality products? ________ g. Research indicates there are five machines on the market capable of producing our product at a competitive cost ________ h. Use of the internal rate of return for each alternative 92) Answer: 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 Explanation: 39
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93) Terrain Vehicle has received three proposals for its new vehicle - painting machine. Information on each proposal is as follows: Proposal X Proposal Y Proposal Z Initial investment in equipment $180 000 $120 000 $190 000 Working capital needed 0 0 10 000 Annual cash saved by operations: Year 1 75 000 50 000 80 000 Year 2 75 000 48 000 80 000 Year 3 75 000 44 000 80 000 Year 4 75 000 8000 80 000 Salvage value end of year: Year 1 100 000 80 000 60 000 Year 2 80 000 60 000 50 000 Year 3 40 000 40 000 30 000 Year 4 10 000 20 000 15 000 Working capital returned 0 0 10 000 Required: Determine each proposal's payback.
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