BMAL 530 Homework 5

Description

Question 1

 

Beyer Company is considering the purchase of an asset for $205,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Assume that Beyer requires a 9% return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

 

a. Compute the net present value of this investment.

 

b. Should Beyer accept the investment?

 

Question 2

 

A new operating system for an existing machine is expected to cost $770,000 and have a useful life of six years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $24,000.

 

A machine costs $520,000, has a $37,100 salvage value, is expected to last eight years, and will generate an after-tax income of $86,000 per year after straight-line depreciation.

 

Assume the company requires a 12% rate of return on its investments. Compute the net present value of each potential investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

 

Question 3

 

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $384,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 153,600 units of the equipment’s product each year. The expected annual income related to this equipment follows.

 

If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

 

Question 4

 

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

 

a. For each alternative project compute the net present value.

 

b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

 

Question 5

 

Following is information on two alternative investments being considered by Tiger Co. The company requires a 5% return from its investments.

 

Compute the internal rate of return for each of the projects using Excel functions. Based on internal rate of return, indicate whether each project is acceptable. (Round your answers to 2 decimal places.)