Chapter 24: Q12QS (page 1084)
Refer to the information in QS 24-11 and instead assume the investment has a salvage value of $20,000. Compute the investment’s net present value.
The net present value of the project is $28,659.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Yokam Company is considering two alternative projects. Project 1 requires an initial investment of \(400,000 and has a present value of cash flows of \)1,100,000. Project 2 requires an initial investment of \(4 million and has a present value of cash flows of \)6 million. Compute the profitability index for each project. Based on the profitability index, which project should the company prefer? Explain.
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.
Retsa Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of \(800,000 and will yield the following expected cash flows. Management requires investments to have a payback period of two years, and it requires a 10% return on its investments.
Period Cash Flow
1 . . . . . . . . . . . . \)450,000
2 . . . . . . . . . . . . 400,000
3 . . . . . . . . . . . . 350,000
4 . . . . . . . . . . . . 300,000
Required
1. Determine the payback period for this investment. (Round the answer to one decimal.)
2. Determine the break-even time for this investment. (Round the answer to one decimal.)
3. Determine the net present value for this investment.
Analysis Component
4. Should management invest in this project? Explain.
5. Compare your answers for parts 1 through 4 with those for Problem 24-5B. What are the causes of the differences in results and your conclusions?
Google managers must select depreciation methods. Why does the use of the accelerated depreciation method (instead of straight-line) for income tax reporting increase an investment’s value?
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. What is the investment’s payback period?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
