QUESTION 9 (Ignore income taxes in this problem.) Shields Company has gathered t

Question

QUESTION 9

(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project:

  Investment required in equipment

$680,000     

  Annual cash inflows

$66,000     

  Salvage value

$0     

  Life of the investment

20 years     

  Discount rate

7%

The payback period for the investment is closest to: (Round your answer to 1 decimal place.)

0.1 years

1.0 years

10.3 years

8.3 years

7 points   

QUESTION 10

(Ignore income taxes in this problem.) The management of Melchiori Corporation is considering the purchase of a machine that would cost $320,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $112,000 per year. The company requires a minimum pretax return of 13% on all investment projects.

Click here to view Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.

The present value of the annual cost savings of $112,000 is closest to: (Round your final answer to the nearest dollar amount.)

$171,448

$784,000

$1,139,462

$495,376

7 points   

(Ignore income taxes in this problem.) Shields Company has gathered the following data on a proposed investment project:

Explanation / Answer

Question 9. The correct option is C. 10.3 years.

Payback period is calculated as Initial investment / Annual cash flows = 680,000 / 66,000 =10.30 years

Question 10. The correct option is D. $ 495,376

The PVIFA at 13% for 7 years is 4.423.

Present value of annual cost savings during project life is $ 112,000 x 4.423 =$ 495,376

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