1.)Orasco Company is considering purchasing new equipment for $352,657. It is ex
ID: 2428201 • Letter: 1
Question
1.)Orasco Company is considering purchasing new equipment for $352,657. It is expected that the equipment will produce net annual cash flows of $49,670 over its 10-year useful life. Annual depreciation will be $35,266. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)
_____?___years
2.)Asaki Company accumulates the following data concerning a proposed capital investment: cash cost $210,840, net annual cash flows $40,000, present value factor of cash inflows for 10 years 5.43 (rounded). Determine the net present value, and indicate whether the investment should be made. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45).)
Net present value $__________
Should the investment be made? No/Yes
3.)Neville Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $160,613 and have an estimated useful life of 8 years. It will be sold for $70,800 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $24,300. The company's borrowing rate is 8%. Its cost of capital is 10%. Calculate the net present value of this project to the company. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.)
$_____?_____
The project (is or not) acceptable.?
4.)Keane Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $205,217 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $37,300. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Assume a discount rate of 10%. (Hint: Calculate the net present value. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.)
$______________
Explanation / Answer
1. Cash payback period: It is the time period required to recover the cost of the capital investment from
net annual cash flow producd by the investment.Cash payback period can be
determined by using the following formula.
Cash payback period = cost of capital investment / Net annual cash flow
= $352,657 / $49,670
Therefore Cash payback period = 7.1 Years.
2. Net present value: The Net present value of an investment is the difference betwen its market value and its cost.NPV rule is to take a project if its NPV is positive.NPV is estimated by calculating the present value of future cash flows and then subtracting the cost.
Calculating Net present value:(for uniform cash flows)
Present value factor of cash inflows for 10 years = 5.43
Net annual cash flows = $40,000
present value of net cash flows = PV factor x Annual cash flows
= 5.43 x 40,000
Present value of net cash flows = 217,200.
( Less) Capital investment = 210,840
Therefore Net present value = $6,360,
As the net present value is positive the investment should be made.
3. Net present value:
Cost of the investment(Exhibit cost) = $160,613
Estimated life of the asset = 8 years
Salvage value of the asset =$ 70,800
Cost of capital = 10%
Net annual cash flows = $24,300
Calculating the net present value:
present value factor of cash inflows for 8 years at 10% cost of capital = 5.33
Present value of net cash flows = PVfactor x Annual cash flows
= 5.33 x 24,300
so present value of net cash flows = 129,519
(Add) Salvage value = 70,800
Present value of total cash flows =$ 200,319
(Less) Capital investment =$160,613
Therefore Net present value = $ 39,706.
As the net present value is positive the project is acceptable.
4.Net present value:
Cost of the investment = $205,217
Estimated life = 8 years
Annual cash flows = $ 37,300
Discount rate = 10%
Calculating net present value:
Present value of the cash flows for 8 years at 10% discount rate = 5.3349
Present value of net cash flows = PV factor x Annual cash flows
= 5.3349 x 37,300
So present value of net cash flows = 198,991.77
(Less) Capital investment = 205,217
Therefore Net present value = (6225.23).
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