Question

Adams Auto Repair, Inc. is evaluating a project to purchase equipment that will not only expand...

Adams Auto Repair, Inc. is evaluating a project to purchase equipment that will not only expand the company’s capacity but also improve the quality of its repair services. The board of directors requires all capital investments to meet or exceed the minimum requirement of a 10 percent rate of return. However, the board has not clearly defined the rate of return. The president and controller are pondering two different rates of return: unadjusted rate of return and internal rate of return. The equipment, which costs $105,000, has a life expectancy of six years. The increased net profit per year will be approximately $6,500, and the increased cash inflow per year will be approximately $22,713. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

    

Required

  1. a-1. Determine the unadjusted rate of return and (use average investment) to evaluate this project. (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

  2. a-2. Based on the unadjusted rate of return, should the company invest in the equipment?

  3. b-1. What is the approximate internal rate of return of this project?

  4. b-2. Based on the internal rate of return, should the company invest in the equipment?

  5. c. Which method is better for this capital investment decision?

Homework Answers

Answer #1

a1

a2

Yes prject should be accepted as 12.38%>10%.

b1

b2

Project should not be accepted as IRR is 7.99% which is less than 10%

c.

IRR should be used to decide capital investment as it considers time value of money.

If you have any doubt, you can ask me in the comment section

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Solomon Auto Repair, Inc. is evaluating a project to purchase equipment that will not only expand...
Solomon Auto Repair, Inc. is evaluating a project to purchase equipment that will not only expand the company’s capacity but also improve the quality of its repair services. The board of directors requires all capital investments to meet or exceed the minimum requirement of a 10 percent rate of return. However, the board has not clearly defined the rate of return. The president and controller are pondering two different rates of return: unadjusted rate of return and internal rate of...
Zachary Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the...
Zachary Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,287,000 per year. The cost of the equipment is $9,187,846.67. Zachary expects it to have a 11-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)...
Suzanne’s Restaurant Supplies is considering the purchase of manufacturing equipment that will cost $20,000. The annual...
Suzanne’s Restaurant Supplies is considering the purchase of manufacturing equipment that will cost $20,000. The annual cash inflows for the next three years will be: Year Cash Flow 1 $10,000 2 $9,000 3 $6,500 A. Determine the internal rate of return B. With a cost capital of 12%, should the machine be purchased?
(Ignore income taxes in this problem.) Ursus Inc., is considering a project that would have a...
(Ignore income taxes in this problem.) Ursus Inc., is considering a project that would have a ten-year life and would require a $1,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: Sales $2,000,000 Variable Expenses $1,400,000 Contribution Margin $600,000 Fixed Expenses $400,000 Net Operating Income $200,000 All of these items, except for depreciation of $92,500 a...
Dwight Donovan, the president of Baird Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Baird Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $111,000...
Dwight Donovan, the president of Vernon Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Vernon Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $115,000...
Dwight Donovan, the president of Campbell Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Campbell Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $113,000...
Dwight Donovan, the president of Benson Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Benson Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of three years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $104,000...
Dwight Donovan, the president of Baird Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Baird Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of three years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $108,000...
Dwight Donovan, the president of Munoz Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Munoz Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of three years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $103,000...