# The new machine costs 160 000 and has a predicted

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The new machine costs \$160 000 and has a predicted salvage value of \$24 000 at the end of six years. If purchased, the new machine will allow cash savings of \$40 000 for each of the first three years, and \$20 000 for each year of its remaining six - year life. Required: What is the net present value of purchasing the new machine if the company has a required rate of return of 14%? 87) Answer: Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Initial investment \$(160 000) 0 1.000 \$(160 000) Salvage of old 20 000 0 1.000 20 000 Annual operations 40 000 1 - 3 2.322 92 880 Annual operations 20 000 4 - 6 (3.889 - 2.322) 31 340 Save by not rebuilding 40 000 1 0.877 35 080 Salvage of new 24 000 6 0.456 10 944 Net present value \$30 244 Explanation: 34

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88) Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for \$36 586 and requires working capital of \$4000. Its estimated useful life is five years and will have a salvage value of \$4000. Recovery of working capital will be \$4000 at the end of its useful life. Annual cash savings from the purchase of the machine will be \$10 000. Required: a. Compute the net present value at a 14% required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment. 88) Answer: a. Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Investment \$(36 586) 0 1.000 \$(36 586) Working capital needed (4000) 0 1.000 (4000) Annual operations 10 000 1 - 5 3.433 34 330 Working capital returned 4000 5 0.519 2076 Salvage value 4000 5 0.519 2076 Net present value \$(2104) b. Trial and error is required. Because net present value is negative in Part a, the internal rate of return is less than 14%. Start by trying 12%. Predicted Cash Flows Year(s) PV Factor PV of Cash Flows Investment \$(36 586) 0 1.000 \$(36 586) Working capital needed (4000) 0 1.000 (4000) Annual operations 10 000 1 - 5 3.605 36 050 Working capital returned 4000 5 0.567 2268 Salvage value 4000 5 0.567 2268 Net present value \$ - 0 - With a zero net present value, the internal rate of return is 12%. c. Payback period = (\$36 586 + \$4000)/\$10 000 = 4.06 years. Explanation: 35
89) Central Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows: Proposal X Proposal Y Proposal Z Initial investment in equipment \$115 000 \$130 000 \$145 000 Working capital needed 0 0 15 000 Annual cash saved by operations: Year 1 55 000 60 000 60 000 Year 2 55 000 40 000 60 000 Year 3 55 000 40 000 60 000 Year 4 55 000 10 000 60 000 Salvage value end of year: Year 1 30 000 25 000 45 000 Year 2 25 000 20 000 40 000 Year 3 20 000 15 000 35 000 Year 4 15 000 10 000 25 000 Working capital returned: 0 0 15 000 Required: Determine each proposal's payback. 89) Answer: Proposal X payback = \$115 000/\$55 000 = 2.09 years Proposal Y Cash Savings Savings Accumulated To be Recovered Year 0 \$130 000 Year 1 \$60 000 \$60 000 70 000 Year 2 40 000 100 000 30 000 Year 3 25 000 140 000 0 Proposal Y payback = 2 years plus \$30 000/\$40 000 or 2.75 years Proposal Z payback = (\$145 000 + \$15 000)/\$60 000 = 2.67 years Explanation: 36

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90) Supply the missing data for each of the following proposals: Proposal A Proposal B Proposal C Initial investment (a) \$62 900 \$226 000 Annual net cash inflow \$60 000 (c) (e) Life, in years 10 6 10 Salvage value \$0 \$10 000 \$0 Payback period in years (b) (d) 5.65 Internal rate of return 12% 24% (f) 90) Answer: a.
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