Answer the following independent questions. Support your answers with clearly identified formulas
and computation.
a. A company is considering purchasing factory equipment that costs $400,000 and is estimated to have no salvage value at the end of its 5-year useful life.
If the equipment is purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000. The straight-line method of depreciation would be used.
Calculate the cash payback period on the equipment
b. Consider the following data (and ignore the impact of income taxes):
Initial cost of equipment $ 962,000
Annual cash inflows $ 191,720
Salvage value $ 0
Estimated life 10 years
Calculate the internal rate of return on this investment
c. A company is considering purchasing factory equipment that costs $400,000 and is estimated to have no salvage value at the end of its 5-year useful life.
If the equipment is purchased, annual revenues are expected to be $150,000 and annual operating expenses exclusive of depreciation expense are expected to be $25,000. The straight-line method of depreciation would be used.
If the equipment is purchased, calculate the annual rate of return that expected on this equipment
d. Calculate the net present value of a project with the following cash flows if the required rate of return is 14 percent
Year Cash flows
0 $(33,680)
1 10,796
2 22,308
3 4,170
e. You are considering the following two mutually exclusive projects. The required rate of return is 13 percent for the project A and 10.5 percent for the project B.
Prove with computation which the project to accept. Support your answer using NPV, IRR, cash payback period, and profitability index methods.
Year Project A Project B
0 $ (54,000) $ (78,000)
1 $ 36,300 $ 35,700
2 $ 24,600 $ 62,800
3 $ 9,500 $ 0
No comments:
Post a Comment
Note: only a member of this blog may post a comment.