Required calculate the accrual accounting rate of

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Required: Calculate the accrual accounting rate of return based on the initial investment. 83) Answer: Accrual accounting income = $206 000 - (($500 000 - $20 000)/5) = $206 000 - $96 000 = $110 000 AARR with initial investment = $110 000/($500 000 + $50 000) = $110 000/$550 000 = 0.20 Explanation: 31
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84) The Rockhampton Chronicle needs to overhaul its printing press or buy a new one. The facts have been gathered, and they are as follows: Current Machine New Machine Purchase Price, New $240 000 $450 000 Current book value 90 000 Overhaul needed now 120 000 Annual cash operating costs 210 000 120 000 Current salvage value 60 000 Salvage value in five years 15 000 60 000 Required: Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes. 84) Answer: Present value of keeping current system : Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Overhaul $(120 000) 0 1.000 $(120 000) Annual operations (210 000) 1 - 5 2.991 (628 110) Salvage value 15 000 5 0.402 6030 Net present value $(742 080) Present value of new system : Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Investment $(100 000) 0 1.000 $(450 000) Salvage value, old 60 000 0 1.000 60 000 Annual operations (120 000) 1 - 5 2.991 (358 920) Salvage value 60 000 5 0.402 24 120 Net present value $(724 800) Buying the new equipment is the most desirable by $17 280 ($742 080 - $724 800). Explanation: 32
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85) Adelaide Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $83 840 and has predicted cash inflows of $20 000 per year for 10 years. It will have no salvage value. Required: a. Using a required rate of return of 16%, determine the net present value of the investment proposal. b. Determine the proposal's internal rate of return. 85) Answer: a. Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Initial investment $(83 840) 0 1.000 $(83 840) Annual cash flows 20 000 10 4.833 96 660 Net present value $12 820 b. Present value factor of an annuity of $1.00 = $83 840/$20 000 = 4.192. From the annuity table, the 4.192 factor is closest to the 10 - year row at the 20% column. Therefore, the IRR is 20%. Explanation: 86) Kalgoorlie Productions is considering buying an automated machine that costs $250 000. It requires working capital of $25 000. Annual cash savings are anticipated to be $103 000 for five years. The company uses straight - line depreciation. The salvage value at the end of five years is expected to be $10 000. The working capital will be recovered at the end of the machine's life. Required: Calculate the accrual accounting rate of return based on the initial investment. 86) Answer: Accrual accounting income = $103 000 - (($250 000 - $10 000)/5) = $103 000 - $48 000 = $55 000 AARR with initial investment = $55 000/($250 000 + $25 000) = $55 000/$275 000 = 0.20 Explanation: 33
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87) Lake Torrens Boating Company is interested in replacing a moulding machine with a new improved model. The old machine has a salvage value of $20 000 now and a predicted salvage value of $4000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40 000.
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