1.Brady Corp. is considering the purchase of a piece of equipmentthat costs $23,000. Projected net annual cash flows over theproject%u2019s life are:
Year Net Annual Cash Flow
1 $ 3,000
2 8,000
3 15,000
4 9,000
The cash payback period is
b. 2.80 years.
2. Bradshaw Inc. is contemplating a capital investment of$85,000. The cash flows over the project%u2019s four yearsare:
ExpectedAnnual Expected Annual
Year CashInflows Cash Outflows
1 $30,000 $12,000
2 45,000 20,000
3 60,000 25,000
4 50,000 30,000
The cash payback period is
b. 3.35 years.
3. JordanCompany is considering the purchase of a machine with the followingdata:
Initialcost $130,000
One-time trainingcost 12,000
Annual maintenancecosts 15,000
Annual costsavings 75,000
Salvagevalue 20,000
The cash payback period is
a. 2.37 years.
4. A company isconsidering purchasing a machine that costs $320,000 and isestimated to have no salvage value at the end of its 8-year usefullife. If the machine is purchased, annual revenues are expected tobe $100,000 and annual operating expenses exclusive of depreciationexpense are expected to be $38,000. The straight-line method ofdepreciation would be used.
The cash payback period on themachine is
c. 5.2 years.
1.Brady Corp. is considering the purchase of a piece of equipmentthat costs $23,000. Projected net annual cash flows over theproject%u2019s life are:
Year Net Annual Cash Flow
1 $ 3,000
2 8,000
3 15,000
4 9,000
The cash payback period is
b. 2.80 years.
2. Bradshaw Inc. is contemplating a capital investment of$85,000. The cash flows over the project%u2019s four yearsare:
ExpectedAnnual Expected Annual
Year CashInflows Cash Outflows
1 $30,000 $12,000
2 45,000 20,000
3 60,000 25,000
4 50,000 30,000
The cash payback period is
b. 3.35 years.
3. JordanCompany is considering the purchase of a machine with the followingdata:
Initialcost $130,000
One-time trainingcost 12,000
Annual maintenancecosts 15,000
Annual costsavings 75,000
Salvagevalue 20,000
The cash payback period is
a. 2.37 years.
4. A company isconsidering purchasing a machine that costs $320,000 and isestimated to have no salvage value at the end of its 8-year usefullife. If the machine is purchased, annual revenues are expected tobe $100,000 and annual operating expenses exclusive of depreciationexpense are expected to be $38,000. The straight-line method ofdepreciation would be used.
The cash payback period on themachine is
c. 5.2 years.
Related questions
QUESTION 1
Which of the following statements is correct regarding thepayback method as a capital budgeting technique?
The payback method considers the time value of money. | ||
An advantage of the payback method is that it indicates if aninvestment will be profitable. | ||
The payback method provides the years needed to recoup theinvestment in a project. | ||
Payback is calculated by dividing the annual cash inflows by thenet investment. |
0.625 points
QUESTION 2
Taxes are not an important consideration indeveloping cash flow assessments.
True
False
0.625 points
QUESTION 3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:
Parkways Inc. is considering the purchase of a new machine. Themachine will cost $60,000 to purchase and will generate $15,000 ofcash revenues per year for the next 8 years. The machine will cost$1,000 per year to operate & maintain. At the end of it'suseful life, it has an estimated salvage value of $5,000. Parkwaysrequires a minimum rate of return of 14% for this class of asset.Determine the Net Present Value of this investment proposal.
PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639
$6,701 | ||
$57,000 | ||
$1,166 | ||
$0 |
0.625 points
QUESTION 4
Sun Devil Corporation is adding a new product line that willrequire an investment of $138,000. The product line is estimated togenerate net cash flows of $25,000 the first year, $23,000 thesecond year, and $18,000 each year thereafter for ten more years.What is the payback period?
7.26 | ||
5.52 | ||
7.00 | ||
7.67 |
0.625 points
QUESTION 5
Sparky Company invested in an asset with a useful life of 5years. The companys required rate of return is 10% for this classof asset. The net cash flows are estimated to be $7,610 per yearfor the next 5 years and no salvage value is anticipated.
If the asset generates a positive net present value of $2,000,what was the amount of the original investment? (Roundyour answer to the nearest whole dollar. Do not use $signs or commas in recording youranswer. EXAMPLE: If you answer is $22,516,enter your answer as 22516).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 6
Suppose Whole Foods is considering investing inwarehouse-management software that costs $500,000, has $60,000residual value and should lead to cash cost savings of $130,000 peryear for its five-year life. Determine the NPV of the investment ifmanagement uses a 12% discount rate. (Round to the nearest wholenumber for your final answer. When recording your answer, do notuse $ dollar signs or commas. EXAMPLE: If you answer is $12,251,enter 12251)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 7
ABC, Corporation is looking to purchase a new piece of equipmentfor $121,505. The equipment has a useful life of 8 years and noexpected salvage value.
The minimum desired rate of return is 10%. ABC is uncertain asto the annual net cash flows the equipment will generate.
What is the minimum annual net cashflow ABC must achieve in order to justify the purchase of this newequipment?
(Round your answer to the nearest whole dollar. Do not use $dollar signs or commas when recording your answer.)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 8
Sparky Company is considering the replacement of an old machinewith the purchase of a new piece of production equipment that willreduce labor and maintenance costs by $45,000 peryear. If Sparky purchases the new machine, the companywill sell the old equipment for an estimated $20,000 salvage value.Data related to the new machine follows:
InitialInvestment $300,000
UsefulLife 10years
Salvagevalue (newmachine) $30,000
HurdleRate 12%
Assume all cash flows occur at the end of the year and ignoreincome taxes. Calculate the net present value of theinvestment in the new machine. (Round your answer to the nearestwhole dollar. If you have a negative NPV, record youranswer using () parenthesis. EXAMPLE: If yourNPV is ($2,000), enter your answer as (2000).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
Management Accounting Application
In this assignment you will demonstrate your understanding ofcapital investment techniques by
evaluating the following three case studies.
Case Analysis 1:
You work for a small, local telecommunications company. In fiveyears, the company plans to undertake a major upgrade to itsservers and other IT infrastructure. Management estimates that itwill need up to
$450,000 to cover all related costs; however, as a fairly youngcompany, the goal is to pay for the
upgrade with cash and not to take out loans.
Right now, you have $300,000 in a bank account established forCapital Investments. This account pays
6% interest, compounded annually.
A member of the finance department has approached you with aninvestment opportunity for the
$300,000 that covers a five-year period and has the followingprojected after-tax cash flows:
Year Projected Cash Flow
1 $94,000
2 $114,000
3 $134,000
4 $114,000
5 $94,000
Based on this information, answer the following questions:
1) How much money will be in the bank account if you leave the$300,000 alone until you need it in five
years?
2) If you undertake the investment opportunity, what is theNominal Payback Period?
3) Using the factors for 6%, what is the Discounted PaybackPeriod?
4) What is the Present Value of the benefits from this 5-yearinvestment opportunity?
5) What is the Net Present Value of this investmentopportunity?
6) If you leave the money in the bank and earn 6% compoundedannually, will you have at least
$450,000 in 5 years to fund the server and IT upgrades? By howmuch will you be âoverâ or âshortâ of
what you need?
7) If you undertake the investment, will you have at least$450,000 in your checking account in 5 years?
By how much will you be âoverâ or âshortâ?
Case Analysis 2 :
The CEO of Dynamic Manufacturing was at a conference and talkedto a supplier about a new piece of
equipment for its production process that she believes willproduce ongoing cost savings. As the
Operations Manager, your CEO has asked for your perspective onwhether or not to purchase the
machinery.
After talking to the supplier and meeting with your Engineersand Financial Analysts, youâve gathered the
following pieces of data:
⢠Cost of Machine: $150,000
⢠Estimated Annual After Tax Savings: $65,000
⢠Estimated machinery life: 3 years (after which there will bezero value for the equipment and no
further cost savings)
⢠You seem to recall that Dynamicâs Finance organizationrecommends either a 10% or a 15%
discount rate for all Cost Savings Projects. You are fairly sureit is 10%.
You understand that you need to understand the projectfinancials to ensure that
this investment will be economically attractive to DynamicManufacturingâs shareholders.
Calculate the Nominal Payback, the Discounted Payback, the NetPresent Value and the IRR
assuming:
⢠Part A, BASE CASE: 3 year project life, flat annual savings,10% discount rate
⢠Part B. Saving Growth Scenario: BASE CASE but with 10%compounded annual savings growth
in years 2 & 3.
⢠Part C, Higher Discount Rate Scenario: 3 year project life,flat annual savings, 15% discount rate
⢠Part D, 5 Year Equipment Life:5 year project and savings life,flat annual savings, 10% discount
rate
Discussion â in a Word Document in paragraph form, respond tothe following:
1) From a Financial perspective, would you recommend thispurchase to Management? Which
scenario would you present and why?
2) In your opinion, which scenario is the most aggressive (i.eis based on the most aggressive
assumptions)? If you were to select this scenario as the basisfor your proposal, how would you
justify the more aggressive assumptions?
3) In SIMPLE English (as in talking to a non-Finance and non-MBAperson), explain why there was
a difference in outcome between Part A and Part B.
4) Beyond Financial measures, what other considerations wouldyou want to consider, before
making a recommendation to Management?
5) If you were the CEO, would you approve this proposal? Why orwhy not?
Case Analysis 3:
You are the General Manager at the Bicker, Slaughter and LynchLaw Firm. There is an opportunity to
buy out a small law firm that was just started by a young MBA/JDand you believe the firm can be grown
and become a lucrative part of your Firm.
With help from your Finance leader, you have estimated thefollowing benefit streams for this new
division:
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | |
Before Tax Cash Flow FromOperations | $(149,000) | $- | $51,380 | $88,760 | $114,100 | $129,780 | $143,640 | $167,300 |
After Tax Net Income FromOperations | $(103,500) | $(50,500) | $36,700 | $63,400 | $81,500 | $92,700 | $102,600 | $119,500 |
After Tax Cash Flow FromOperations | $(85,600) | $15,000 | $48,600 | $72,200 | $95,550 | $101,300 | $125,200 | $140,200 |
You estimate that the purchase price for this firm would be$200,000 and that additional net working
capital would be needed in the amount of $60,000 in year 0, anadditional $20,000 in year 2 and then
$20,000 in year 5.
In addition to the purchase price, you would ask that yourAdvertising budget of $275,000 be increased by
an incremental one time amount of $50,000 in advertising in year0 to publicize the firmâs expansion.
Your Finance leader has indicated that the firm has access to acredit line and could borrow the funds at
a rate of 6%. He also mentions that when he runs Projecteconomics for Capital budgeting (such as a
new copier or a company car), he recommends a standard 10% ratediscount but the one other time they
looked at an acquisition of a smaller firm he used a 12% ratediscount.
At the end of 8 years, the plan will be to sell this division.The estimated terminal value (the sale and the
return of working capital) is conservatively estimated to be$300,000 of after tax cash flow help.
Calculate the N Nominal Payback, the Discounted Payback, the NetPresent Value and the IRR for this
potential acquisition.
Discussion â in a Word Document in paragraph form, respond tothe following:
1) From a Financial perspective, would you recommend thispurchase to Management? Why?
2) What are some of the non-financial elements that need to beconsidered for this proposal?
3) Assumptions in Project Economics can have a huge impact onthe result. Identify 3 financial
elements/assumptions in your analysis that would make thisproject not be financially attractive?
(E.g. Answer the question, what would have to be true for thisto be a bad investment?)
4) If you were the CEO would you approve this proposal? Why orwhy not?
