Questions -
Q1. 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.
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Machine A
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Machine B
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Original cost
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$78,320
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$181,100
|
|
Estimated life
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8 years
|
8 years
|
|
Salvage value
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0
|
0
|
|
Estimated annual cash inflows
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$20,110
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$40,280
|
|
Estimated annual cash outflows
|
$4,860
|
$10,200
|
a. Calculate the net present value and profitability index of each machine. Assume a 9% discount rate.
b. Which machine should be purchased?
Q2. 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 $431,800. 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 $114,098 for the next 6 years. Management requires a 10% rate of return on all new investments. (Refer the below table)
a. Calculate the internal rate of return on this new machine.
b. Should the investment be accepted?
Q3. Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $260,500. A new salon will normally generate annual revenues of $61,550, with annual expenses (including depreciation) of $41,300. At the end of 15 years the salon will have a salvage value of $77,000.
Calculate the annual rate of return on the project.