Chapter 24: Q12DQ (page 1083)
The management of Google is planning to acquire new equipment to manufacture tablet computers. What are some of the costs and benefits that would be included in Google’s analysis?
The equipment of the business may become obsolete or to expand the production capacity of the business.
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Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments.
Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value.
Cost of old machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(112,000
Cost of overhaul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Annual expected revenues generated . . . . . . . . . . . . . . . . . . 95,000
Annual cash operating costs after overhaul . . . . . . . . . . . . . . 42,000
Salvage value of old machine in 5 years . . . . . . . . . . . . . . . . 15,000
Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold.
Cost of new machine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)300,000
Salvage value of old machine now . . . . . . . . . . . . . . . . . . 29,000
Annual expected revenues generated . . . . . . . . . . . . . . . 100,000
Annual cash operating costs . . . . . . . . . . . . . . . . . . . . . . . 32,000
Salvage value of new machine in 5 years . . . . . . . . . . . . 20,000
Required 1. Determine the net present value of alternative 1.
2. Determine the net present value of alternative 2.
3. Which alternative do you recommend that management select? Explain.
Park Co. is considering an investment that requires immediate payment of \(27,000 and provides expected cash inflows of \)9,000 annually for four years. If Park Co. requires a 10% return on its investments, what is the net present value of this investment? (Round your calculations to the nearest dollar.)
Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost \(300,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipment’s product each year. The expected annual income related to this equipment follows.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)375,000
Costs Materials, labor, and overhead (except depreciation) . . . . . . . . . . . . . . 200,000
Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,500
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,250
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,250
Required Compute the (1) payback period and (2) accounting rate of return for this equipment. (Record ARR answers as percents, rounded to one decimal.)
Peng Company is considering an investment expected to generate an average net income after taxes of \(1,950 for three years. The investment costs \)45,000 and has an estimated $6,000 salvage value. Compute the accounting rate of return for this investment; assume the company uses straight-line depreciation. Express your answer as a percentage, rounded to two decimal places.
A machine can be purchased for \(150,000 and used for five years, yielding the following net incomes. In projecting net incomes, straight-line depreciation is applied, using a five-year life and a zero salvage value. Compute the machine’s payback period (ignore taxes). (Round the payback period to three decimals.)
Year 1 Year 2 Year 3 Year 4 Year 5
Net income . . . . . . . . . . . . \)10,000 \(25,000 \)50,000 \(37,500 \)100,000
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