Ripit Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors The outlay required is $480,000. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues Cash Expenses 1 $780,000 $600,000 2 780,000 600,000 3 780,000 600,000 4 780,000 600,000 5 780,000 600,000 Problem B – Questions: 1. Compute the payback period for the NC equipment. 2. Compute the NC equipment's ARR. 3. Compute the investment's NPV, assuming a required rate of return of 10 percent. 4.Compute the investment's IRR. Problem C Payback, Accounting Rate of Return, Present Value, Net Present Value, Internal Rate of Return All four parts are independent of all other parts. Assume that all cash flows are after-tax cash flows: a.Randy Willis is considering investing in one of the following two projects. Either project will require aninvestment of $10,000. The expected cash flows for the two projects follow. Assume that each project isdepreciable.b.Wilma Golding is retiring and has the option to take her retirement as a lump sum of $225,000 or toreceive $24,000 per year for 20 years. Wilma's required rate of return is 8 percent. Year Project A Project B 1 $ 3,000 $3,000 2 4,000 4,000 3 5,000 6,000 4 10,000 3,000 5 10,000 3,000
3 c.David Booth is interested in investing in some tools and equipment so that he can do independent drywalling. The cost of the tools and equipment is $20,000. He estimates that the return from owning his ownequipment will be $6,000 per year. The tools and equipment will last six years.d.Patsy Folson is evaluating what appears to be an attractive opportunity. She is currently the owner of asmall manufacturing company and has the opportunity to acquire another small company's equipmentthat would provide production of a part currently purchased externally. She estimates that the savingsfrom internal production will be $25,000 per year. She estimates that the equipment will last 10 years. Theowner is asking $130,400 for the equipment. Her company's cost of capital is 10 percent.
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- Winter '16
- Net Present Value, Net Present Value, a. Randy Willis, c. David Booth