31.) Newport Corp is considering the purchase of a new piece of equipment. The c

Question

31.)

Newport Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $423,440. The equipment will have an initial cost of $1,896,000 and have a 12 year life. There is no salvage value for the equipment. What is the accounting rate of return? Ignore income taxes.

22.33%

44.66%

14.00%

8.33%

32.)

Heidi Inc. is considering whether to lease or purchase a piece of equipment. The total cost to lease the equipment will be $138,000 over its estimated life, while the total cost to buy the equipment will be $84,000 over its estimated life. At Heidi’s required rate of return, the net present value of the cost of leasing the equipment is $77,000 and the net present value of the cost of buying the equipment is $71,000. Based on financial factors, Heidi should

lease the equipment, saving $6,000 over buying.

lease the equipment, saving $54,000 over buying.

buy the equipment, saving $54,000 over leasing.

buy the equipment, saving $6,000 over leasing.

33.)

You will need at least $5,300 in four years and your friend says she can either loan you $5,300 all at once four years from now or she can deposit $1,325 in your savings account at the end of each year for the next four years. Your savings account earns 10% interest, compounded annually. Which option would be worth more to you four years from now, and how much more? (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Round your FV factor to 4 decimal places and final answer to the nearest dollar amount.)

The annual deposits will be worth $849 more than the $5,300 in four years.

The $5,300 in four years will be worth $657 more than the annual deposits.

The $5,300 in four years will be worth $849 more than the annual deposits.

The annual deposits will be worth $657 more than the $5,300 in four years.

34.)

Newport Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $271,000. The equipment will have an initial cost of $2,439,000 and have a 8 year life. There is no salvage value for the equipment. What is the payback period?

0.89 years

9.00 years

4.24 years

8.00 years

35.)

Byron Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $111,000. The equipment will have an initial cost of $475,000 and have a 5 year life. The salvage value of the equipment is estimated to be $79,000. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Round your PV factors to 4 decimal places and final answer to the nearest dollar amount.)

zero

positive $79,000

negative $5,170

positive $475,000

Newport Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $423,440. The equipment will have an initial cost of $1,896,000 and have a 12 year life. There is no salvage value for the equipment. What is the accounting rate of return? Ignore income taxes.

Explanation / Answer

(31) 14.00%

Accounting rate of return (ARR) = Average annual increase in net income / Average investment

= Average annual increase in net income / Initial investment

Annual depreciation = Cost / Useful life = $1,896,000 / 12 = $158,000

Average annual increase in net income = Increase in net income - Annual depreciation

= $(423,440 - 158,000) = $265,440

So,

ARR = $265,440 / $1,896,000 = 0.14, or 14%

Note: First question is answered.

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