34. 8.125% 35. 5.7143 years 36. $791,000 37. $7,100 38. $18,750 Use the followin

Question

34. 8.125%

35. 5.7143 years

36. $791,000

37. $7,100

38. $18,750

Use the following information to answer questions 34 through 38. Winter Sports, Inc., is considering the purchase of new equipment that would allow them to produce a new product line. Information related to the project follows. Information about the new machine Required rate of return Machine cost Estimated salvage value 10 12% $800,000 S50,000 Annual cash flows from the new product line Revenue Variable costs Fixed costs $400,000 150,000 Salaries Advertising Insurance Utilities S56,000 32,000 10,000 2,000 Total Net annual cash flow inflow .10,000 $140,000 34. Compute the simple rate of return (also known as the accounting rate of return) for the project. 35. Compute the payback period for the project.

Explanation / Answer

34.

Simple rate of return =   Net operating income/ initial investmet *100

                                  65000/800000*100=8.125%

                                   Note:

                                    net operating income= cash inflow - depriciation

                                    cash in flow= 140000

                                     depriciation(original cost less salvage value / effectve year

                                      = 800000-50000=750000/10= 75000

35.

Payback period = Initial investment/ cash inflow

                     its given that ,Investment= 800000 & cash inflow= 140000

                    pay back period will be= 800000/140000=5.71428yars approximately 5.7143 years

36.Present value of annual cash inflow of the project will be

             Present value= cash inflow*PVAF 10 YEARS@12%

                     =140000*5.6502= 791028 Rounding it into $791000

37.

Net present value= precent value of cas inflow- present value of cash out flow

Present value of cash inflow has allready fund as 791000

Present value of cash out flow will be=

cost of the project= 800000

10 th year present value of salvage value= 50000*0.3219=16095

pv of cash ou flow wll be = cost - salvage value

                                      = 800000-16095= $783905

NPV= PV OF CASH INFLOW- PV OF CASH OUT

        = 791000-783905=$7095     Rounding into $7100

38.

Annual depriciation tax

which can be calculated on the depriciation value

Depriciation = Net investment- salvage value/ effective life of the assets

                  =800000-50000/10=75000

Tax rat is given as 25%

there for effective tax sheild on dpriciation =75000*25/100= $18750

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