(Ignore income taxes in this problem.) The management of Dewitz Corporation is c
ID: 2455309 • Letter: #
Question
(Ignore income taxes in this problem.) The management of Dewitz Corporation is considering a project that would require an initial investment of $69,000. No other cash outflows would be required. The present value of the cash inflows would be $80,040. The profitability index of the project is closest to:
0.16
1.16
0.86
0.14
(Ignore income taxes in this problem.) Sibble Corporation is considering the purchase of a machine that would cost $290,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $40,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $70,000. The company requires a minimum pretax return of 12% on all investment projects. The net present value of the proposed project is closest to: (Round your 'PV factors' to three decimal places.) (Use Exhibit11B-1 and Exhibit11B-2)
-$37,650
-$2,350
-$39,690
-$14,970
(Ignore income taxes in this problem.) The Jackson Company has invested in a machine that cost $100,000, that has a useful life of ten years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of seven years. Given these data, the simple rate of return on the machine is closest to (Round your intermediate calculations to the nearest dollar amount):
2.86%
4.76%
4.29%
24.29%
Explanation / Answer
I.
Profitability Index = Present value of cash inflows / Initial investment
Profitability of the project = $80,040 / $69,000 = 1.16
The profitability index of the project is closest to 1.16
II.
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Initial Investment
- Cost of machine
-$290,000.00
-
-
-
-
-
Cash inflow
- Savings in cost
-
$70,000.00
$70,000.00
$70,000.00
$70,000.00
$70,000.00
- Salvage value
-
-
-
-
-
$40,000.00
Total cash flow
-$290,000.00
$70,000.00
$70,000.00
$70,000.00
$70,000.00
$110,000.00
PV factor @ 12%
1
0.893
0.797
0.712
0.636
0.568
Present vaue of cash flow
-$290,000.00
$62,510.00
$55,790.00
$49,840.00
$44,520.00
$62,480.00
-$14,860.00
Hence, net present value of the proposed project is closest to -$14,970
III.
Payback period of the machine = 7 years
Annual cost savings because of machine = $100,000 / 7 = $14,286
Life of the machine = 10 years
Salvage value = 0
Annual depreciation cost = $100,000 / 10 = $10,000
Net savings in cost = $14,286 - $10,000 = $4,286 per annum
Rate o return on machine = $4,286 / $100,000 = 0.04286 = 4.29%
Simple rate of return on the machine is closest to 4.29%
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Initial Investment
- Cost of machine
-$290,000.00
-
-
-
-
-
Cash inflow
- Savings in cost
-
$70,000.00
$70,000.00
$70,000.00
$70,000.00
$70,000.00
- Salvage value
-
-
-
-
-
$40,000.00
Total cash flow
-$290,000.00
$70,000.00
$70,000.00
$70,000.00
$70,000.00
$110,000.00
PV factor @ 12%
1
0.893
0.797
0.712
0.636
0.568
Present vaue of cash flow
-$290,000.00
$62,510.00
$55,790.00
$49,840.00
$44,520.00
$62,480.00
-$14,860.00
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