Project Investment Annual Income Life of Project Project 22A Project 23A Project

Question

Project
Investment Annual
Income Life of
Project Project 22A Project 23A Project 24A Project A Project B Project A Project B Exercise 23-13 Stromski Company is considering a capital investment of $149,700 in additional productive facilities. The new machinery is expected to have a useful life of 8 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $19,660 and $49,900, respectively. Stromski has a 11% cost of capital rate, which is the minimum acceptable rate of return on the investment. Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. (Round answers to 2 decimal places, e.g. 5.25.) Using the discounted cash flow technique, compute the net present value. (Round PV factor to 5 decimal places, e.g. 1.25356 and final answers to 0 decimal places, e.g. $1,255.) House Company is considering three capital expenditure projects. Relevant data for the projects are as follows. Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. House Company uses the straight-line method of depreciation. Determine the internal rate of return for each project. (Round Internal Rate of Return Factor to 3 decimal places, e.g. 1.250 and Internal Rate of Return to 0 decimal places, e.g. 23%.) Pfeifer Corporation is considering investing in two different projects. It could invest in both, neither, or just one of the projects. The forecasts for the projects are as follows. The minimum required rate of return acceptable to Pfeifer is 10%. Compute the net present value of the two projects. (Round PV factor to 5 decimal places, e.g. 1.25356 and final answer to 0 decimal places, e.g. $1,255. If NPV is negative then enter the amount with a negative sign preceding the number or parenthesis, e.g. -15,000 or (15,000).)

Explanation / Answer

Exercise 23-13

1. Iniyial Investmnet = 149,600

Life 8 Yrs

ANnual Net Income = 19,660

Annual CFs = 49,900

Cost of capital =11%

Dep using SLN = 149600/8 = 18700

Annual Rate of return (ARR) = Expected Annual Net Inc/Avge Investment

Avge Investment = (149600+0)/2 = 74800

SO ARR = 19660/74800 = 26.28% or 26% .....Ans (1)

Cash PBP = Capital Investment/Net Anual CF

= 149600/49900 = 3.00 Yrs .................Ans (2)

NPV = Initial Inv + PV of CFs

= -149600 + PVIFA(11%,8)*49900

= -149600 + 5.14612*49900

= $107,191 .........................Ans (b)

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Exercise 23-14

Proj 22A : Dep = 196500/5 = $39,300

Proj 23A Dep = 339900/11 =$30,900

Proj 24A Dep = 241500/7 = $34,500

So Proj 22A CF = Annual Income + Dep written back

= 7348 + 39300 = $46,648

So IRR = Initial INV/Annual CF

So IRR for 22A = 196500/46648 = 4.212

From PVIAF Table for n=5,we get IRR = 6%

Proj 23A CF = 30900 + 26344 = $57,244

So IRR = 339900/$57,244 = 5.938

From PVIAF Table for n=11,we get IRR = 12%

Proj 24A CF = 34500+16750 = $51,250

So IRR = 241500/$51,250 = 4.712

From PVIAF Table for n=7,we get IRR = 11%

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Exercise 23-15

NPV for Proj A = Initial Inv + PVIFA(10%,5)*49100

= -217900 + 49100*3.79079

= -$31,772

Npv for Proj B = -297100 + 65100*PVIFA(10%,9)

= -297100 + 65100*5.75902

= $77,812

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