1. Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $56,610. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,700. At the end of 8 years the company will sell the truck for an estimated $27,670. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.
Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5. Round Discount Factor to 5 decimal places, e.g. 0.17986.)
A. Cash Payback Period in years
B. Net Present Value $
The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug’s required rate of return is 12%.
A. Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)
3. Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hiland spent $55,000 to keep it operational. The existing sewing machine can be sold today for $244,020. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7:
The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,200. This new equipment would require maintenance costs of $99,800 at the end of the fifth year. The cost of capital is 9%.
a. Calculate the net present value.
4.BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.
Machine A Machine B
Original Cost $77,780 $183,200
Estimated Life 8 years 8 years
Salvage Value 0 0
Estimated annual cash inflows $19,510 $39,740
Estimated annual cash outflows $4,870 $9,940
a. Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.
|Machine A||Machine B|
|Net present value|
5. Eisler Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $447,400. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of $102,726 for the next 6 years. Management requires a 10% rate of return on all new investments.a. Calculate the internal rate of return on this new machine. (Round answer to 0 decimal places, e.g. 10.)
|Internal rate of return|| |
1 a) New Truck Cost = $56,730 Cost savings = $8,590 Life of the Truck is 8 years Cost of Capital = 8% (Discount rate) Salvage... View the full answer