Question 1. Wet and Wild Water Company drills small commercial oil wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below.
Initial new investment for:
New Drill (life 4 years) $160,000
Additional working capital $32,000
Annual operations with new investment (4 years):
Incremental Cash receipts $160,000
Incremental Cash expenditures $ 88,000
Salvage value of old drill $16,000
Discount rate 20%
What is the net present value of the investment? Income taxes and depreciation are not considered in this problem. Also assume there is no recovery of working capital.
a. $(62,140)
b. $10,389
c. $42, 362
d. $186,336
e. None of the above
Question 2. The Bandage Medical Supply Company has two divisions that operate independently of one another.
The financial data for the year 2001 reported the following results:
The company’s desired rate of return is 10%. Income is to be defined as operating income.
What are the respective residual incomes for the North and South Divisions?
a. $30,000 and $50,000
b. $150,000 and $30,000
c. $150,000 and $50,000
d. $50,000 and a negative $150,000
e. None of the above