13. (Ignore income taxes in this problem.) Gillaspie, Inc., is considering the p

Question

13.

(Ignore income taxes in this problem.) Gillaspie, Inc., is considering the purchase of a machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $51,000. The machine would reduce labor and other costs by $86,000 per year. Additional working capital of $10,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 13% on all investment projects.

The net present value of the proposed project is closest to:



a. $30,155

b. $47,139

c. $2,462

d. $25,585





14.

(Ignore income taxes in this problem.) Mercredi, Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company's 14% required rate of return, the net present value of the cash flows associated with just the tangible costs and benefits is a negative $182,560. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment?



a. $18,256

b. $26,667

c. $35,000

d. $38,000

Explanation / Answer

Question 13
Present value of an annuity for 5 years 13% = 3.517 (using formula or from tables)

Cashflows at year 0 -300000 - 10000 = -$310000

Present value for Annuity of $86000 for 5 years = 86000 x 3.517 = $302462

Present value of salvage value and working capital released at year 5 = (51000 + 10000) x 0.543 = $33123

Thus, net present value = -310000 + 302462+ 33123 = $25585
(D) is the answer

Question 14

Using an annuity table, it is found that the present value of 14% for 10 years investment is 5.216

Thus, in order to make the investment financially acceptable, the cashflows arising from the intangible asset must have a present value of more than $182560

Thus, Let C be the net annual cashflows from intangible asset

C x 5.216 = 182560

C = $35000

Thus, (C) should be the correct answer.

Hope this helps!

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.