Assignment
I. 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.
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Expenses-Depreciation-taxes/equipment cost:
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(45000-12000-10000-15300)/80000
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9.6%
|
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Equipment cost/expenses-depreciation-taxes
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80000/7700
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10.38961039
|
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Equipment cost/expenses-depreciation-taxes
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7700*6.71
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51667
|
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Equipment cost-minimum required rate
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80000-51667
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$28,333.00
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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%?
II. 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:
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Year
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Estimated Annual Cash Inflows
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Estimated Annual Cash Outflows
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Depreciation
|
|
1
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$40,000
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$8,000
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$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?
III. 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)
2. (a) payback period, (b) ARR, and (c) NPV (Assuming taxes).