Assignment
Problem 1
Equipment is purchased at a cost of $80,000. As a result, annual cash revenues are expected to increase by $45,000; annual cash expenses are expected to increase by $12,000; straight-line depreciation is used; the asset has a seven-year life; the salvage value is $10,000. Assume the company is in a 34% tax bracket.
1. Determine the accounting rate of return? (round to the nearest %)
2. Determine the payback period?
3. Determine the NPV assuming a minimum required rate of return of 8%?
Problem 2 (Ignore taxes for this problem)
Terra Networks is planning to buy injection molding machinery costing $180,000. This machinery's expected useful life is 5 years. They require a minimum rate of return of 8%, and have calculated the following data pertaining to the purchase and operation of this machinery:
|
Year
|
Estimated Annual Cash Inflows
|
Estimated Annual Cash Outflows
|
Depreciation
|
|
1
|
$ 40,000
|
$8,000
|
$28,000
|
|
2
|
$50,000
|
$18,000
|
$28,000
|
|
3
|
$75,000
|
$22,000
|
$28,000
|
|
4
|
$105,000
|
$35,000
|
$28,000
|
|
5
|
$110,000
|
$50,000
|
$28,000
|
1. Determine Terra's payback period, accounting rate of return, and NPV for this investment?
Problem 3
Company X is planning on purchasing a 3-D printer. The expected cost of this printer is $75,000, and it is expected to have a useful life of 6 years and an estimated salvage value of $3,000. The printer is expected to produce cash savings of $23,000 per year in reduced labor costs and the cash operating costs to run this printer are estimated to be $5,000 per year. Assuming Company X is in the 34% tax bracket and has a minimum desired rate of return of 12% on this investment.
Determine the:
1. (a) payback period, (b) ARR, and (c) NPV (Ignoring taxes), and
2. (a) payback period, (b) ARR, and (c) NPV (Assuming taxes).