Question

Basic Concepts

Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,066,667. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:

Year |
Cash Revenues |
Cash Expenses |

1 | $2,930,000 | $2,310,000 |

2 | 2,930,000 | 2,310,000 |

3 | 2,930,000 | 2,310,000 |

4 | 2,930,000 | 2,310,000 |

5 | 2,930,000 | 2,310,000 |

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

**Required:**

**1.** Compute the project’s payback period. If
required, round your answer to two decimal places.

years

ans: 3.33 years

**2.** Compute the project’s accounting rate of
return. Enter your answer as a whole percentage value (for example,
16% should be entered as "16" in the answer box).

ans. 10%

**3.** Compute the project’s net present value,
assuming a required rate of return of 10 percent. When required,
round your answer to the nearest dollar.

ans: $

**4.** Compute the project’s internal rate of
return. Enter your answers as whole percentage values.

ans: Between______ % and______ %

Answer #1

NPV: Basic Concepts
Buena Vision Clinic is considering an investment that requires
an outlay of $600,000 and promises a net cash inflow one year from
now of $810,000. Assume the cost of capital is 10 percent.
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must be used to solve the following problems.
Required:
1. Break the $810,000 future cash inflow into
the three components shown below. Enter all your answers as
positive amounts.
a. The return of...

Internal Rate of Return
Manzer Enterprises is considering two independent
investments:
A new automated materials handling system that costs $900,000
and will produce net cash inflows of $300,000 at the end of each
year for the next four years.
A computer-aided manufacturing system that costs $775,000 and
will produce labor savings of $400,000 and $500,000 at the end of
the first year and second year, respectively.
Manzer has a cost of capital of 8 percent.
The present value tables provided...

NPV and IRR
Each of the following scenarios is independent. All cash flows
are after-tax cash flows.
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must be used to solve the following problems.
Required:
1. Patz Corporation is considering the purchase
of a computer-aided manufacturing system. The cash benefits will be
$895,000 per year. The system costs $4,104,000 and will last six
years. Compute the NPV assuming a discount rate of 6 percent.
$
Should the company...

NPV and IRR
Each of the following scenarios is independent. All cash flows
are after-tax cash flows.
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must be used to solve the following problems.
Required:
1. Patz Corporation is considering the purchase
of a computer-aided manufacturing system. The cash benefits will be
$787,000 per year. The system costs $4,697,000 and will last nine
years. Compute the NPV assuming a discount rate of 8 percent.
$
Should the company...

NPV and IRR
Each of the following scenarios is independent. All cash flows
are after-tax cash flows.
The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must be used to solve the following problems.
Required:
1. Patz Corporation is considering the purchase
of a computer-aided manufacturing system. The cash benefits will be
$854,000 per year. The system costs $4,559,000 and will last ten
years. Compute the NPV assuming a discount rate of 12
percent.
$
Should the company...

Cardinal Company is considering a project that would require a
$2,875,000 investment in equipment with a useful life of five
years. At the end of five years, the project would terminate and
the equipment would be sold for its salvage value of $300,000. The
company’s discount rate is 16%. The project would provide net
operating income each year as follows:
Sales
$
2,871,000
Variable
expenses
1,018,000
Contribution
margin
1,853,000
Fixed expenses:
Advertising,
salaries, and other
fixed out-of-pocket costs
$...

XYZ Company is considering the purchase of new equipment that
will cost $130,000. The equipment will save the company $38,000 per
year in cash operating costs. The equipment has an estimated useful
life of five years and a zero expected salvage value. The company's
cost of capital is 10%.
Required:
1) Ignoring income taxes, compute the net present value and
internal rate of return. Round net present value to the nearest
dollar and round internal rate of return to the...

Cardinal Company is considering a project that would require a
$2,500,000 investment in equipment with a useful life of five
years. At the end of five years, the project would terminate and
the equipment would be sold for its salvage value of $200,000. The
company’s discount rate is 12%. The project would provide net
operating income each year as follows:
Sales
$
2,853,000
Variable
expenses
1,200,000
Contribution
margin
1,653,000
Fixed expenses:
Advertising,
salaries, and other
fixed...

Cardinal Company is considering a five-year project that would
require a $2,500,000 investment in equipment with a useful life of
five years and no salvage value. The company’s discount rate is
12%. The project would provide net operating income in each of five
years as follows: Sales $ 2,853,000 Variable expenses 1,200,000
Contribution margin 1,653,000 Fixed expenses: Advertising,
salaries, and other fixed out-of-pocket costs $ 790,000
Depreciation 500,000 Total fixed expenses 1,290,000 Net operating
income $ 363,000 Click here to...

Doug’s Custom Construction Company is considering three new
projects, each requiring an equipment investment of $26,840. Each
project will last for 3 years and produce the following net annual
cash flows.
Year
AA
BB
CC
1
$8,540
$12,200
$15,860
2
10,980
12,200
14,640
3
14,640
12,200
13,420
Total
$34,160
$36,600
$43,920
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...

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