Capital Budget Problem 1 Problem 2 Problem 3
Problem 4 Problem 5
Problem 6 Problem 7 Campus Print Shop is thinking of purchasing a new, modern copier that automatically collates pages. The machine would cost $22,000 cash. A service contract on the machine, considered a must because of its complexity, would be an additional $200 per month. The machine is expected to last eight years and have a resale value of $4,000. By purchasing the new machine, Campus would save $450 per month in labor costs and $100 per month in materials costs due to increased efficiency. Other operating costs are expected to remain the same. The old copier would be sold for its scrap value of $1,000. Campus requires a return of 14% on its capital investments. As a consultant to Campus, compute: 1. The payback period 2. The accounting rate of return 3. The net present value 4. The internal rate of return Problem 8 Osaka Company is planning to buy new equipment to expand their production of a popular desk. Estimated data are:
Cash cost of the new equipment now $380 000 Estimated life in years 10 Terminal salvage value $ 60 000 Incremental revenues per year $320 000 Incremental expenses per year (other than depreciation) $165 000 Assume a 60% flat rate for income taxes. The company receives all revenues and pays all expenses other than depreciation in cash. Use a 14% discount rate. Assume that the company uses ordinary straight-line depreciation based on a ten-year recovery period for tax purposes. Also assume that the company depreciates the original cost less the terminal salvage value. The present value of $1 at 14% for ten years is ; the present value of an annuity of $1 at 14% for ten years is .; the future value of $1 at 14% for ten years is ; the future value of an annuity of $1 at 14% for ten years is 19. 337. Compute: (1) Anticipate net income per year (2%) (2) Annual net cash flow (3%) (3) Payback period (2%) (4) Accounting rate of return on initial investment (2%) (5) Net present value (3%) Problem 9 High Flying Company has an opportunity to make an investment that will yield $1,000 net cash inflow per year for the next 10 years. The investment will cost $6,000 and will have no salvage value. After cost reduction and depreciation related to the new investment, the future average annual net income will increase $800. The present value of $1 at 10% for ten years is ; the present value of an annuity of $1 at 10% for ten years is .; the future value of $1 at 10% for ten years is ; the future value of an annuity of $1 at 10% for ten years is . Required: Compute the following (1) The payback period (2%) (2) The accounting rate of return (2%) (3) The net present value. (Use a 10% discount rate.) (4%) (4) The internal rate of return. (The hurdle rate is 10%) (4%) Problem 10 Hammerlink Company has been offerd a special-purpose metal-cutting machine for $110,000. The Machine is expected to have a useful life of eight years, with a terminal disposal value of $30,000. Savings in cash operating costs are expected to be $25,000 per year. However, additional working capital is needed to keep the machine running efficiently without stoppages. Working capital includes such item as filters, lubricants, bearings, abrasives, flexible exhaust pipes, and belts. So another $8,000 needs to be invested at the beginning, but this investment is fully recoverable (will be “cashed in”) at the end of the useful life. Hammerlink’s required rate of return is 14%. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Required: 1. Calculate the net present value of this capital project.
2. Assume NPV is 2,190 at 16% (required rate of return) and -5,942 at 18% (required rate of return). Calculate the internal rate of return of this capital project. 3. Calculate accrual accounting rate of return of this capital project based on net initial investment. Assume straight-line depreciation. 4. Calculate the payback period of this capital project. 5. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods ( NPV and IRR)？
