Keane Bottling Corporation is considering the purchase of a new bottling machine
ID: 2387958 • Letter: K
Question
Keane Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $187,128 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $35,100. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Assume a discount rate of 11%. (Hint: Calculate the net present value. If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.)Orkin Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $538,221, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $71,700. Project B will cost $378,386, has an expected useful life of 14 years, a salvage value of zero, and is expected to increase net annual cash flows by $52,200. A discount rate of 8% is appropriate for both projects. Compute the net present value and profitability index of each project. Which project should be accepted? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. Round computations for Discount Factor to 5 decimal places. )
Net present value - Project A $
Profitability index - Project A
Net present value - Project B $
Profitability index - Project B
Which project should be accepted
Lovitz Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $179,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $35,565. What is its approximate internal rate of return
Chris's Custom Manufacturing Company is considering three new projects, each requiring an equipment investment of $31,878. Each project will last for 3 years and produce the following net annual cash flows.
Year AA BB CC
1 $11,178 $14,559 $18,078
2 14,352 14,559 13,938
3
20,838
14,559
15,318
Total
$46,368
$43,677
$47,334
The equipment's salvage value is zero, and Chris uses straight-line depreciation. Chris will not accept any project with a cash payback period over 2 years. Chris's required rate of return is 12%.
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Compute each project's payback period, indicating the most desirable project and the least desirable project using this method. (Round answers to 2 decimals, e.g. 10.50, and assume in your computations that cash flows occur evenly throughout the year.)
AA years
BB years
CC years
The most desirable project based on payback period is .
The least desirable project based on payback period is .
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Compute the net present value of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125. Round computations for Discount Factor to 5 decimal places.)
AA $
BB $
CC $
SRB Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below.
Machine A Machine B
Original cost $77,750 $189,900
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $19,670 $39,750
Estimated annual cash outflows $4,860 $8,960
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round computations and final answer for present value to 0 decimal places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50. Round computations for Discount Factor to 5 decimal places.)
Machine A
Net present value $
Profitability index
Machine B
Net present value $
Profitability index
Which machine should be purchased?
Explanation / Answer
Using the present value of an ordinary annuity formula, the present value of the cash flows would be: PVoa = PMT [(1 - (1 / ((1 + i)^n))) / i] Where: PVoa = Present Value of an Ordinary Annuity PMT = Amount of each payment (38,000) i = Discount Rate Per Period (0.11) n = Number of Periods (8) = $195,552.66 $195,552.66 - 201,231 = ($5,678.34) NPV
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