1. T or F : The project profitability index is used to compare the net present v
ID: 2486760 • Letter: 1
Question
1. T or F : The project profitability index is used to compare the net present values of two investments that require different amounts of investment funds.
3. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $31,000 and will have a 6-year useful life and a $4,300 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $32,300 per year. The cost of these prescriptions to the pharmacy will be about $25,600 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to:
A 3.8 years
B 4 years
C 4.6 years
D 5.3 years
6. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 150 kilograms of the raw material that are in stock and that originally cost the company $2,346 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.90 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.20 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $74 for all 150 kilograms. What is the relevant cost of the 150 kilograms of the raw material when deciding whether to proceed with the special project?
A $1,185
B $1,080
C $1,165
D $1,006
9. Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $190,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $28,000 per year to operate and maintain, but would save $60,000 per year in labor and other costs. The old machine can be sold now for scrap for $19,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)
A 6.84%
B 7.60%
C 31.58%
D 15.20%
3. (Ignore income taxes in this problem.) Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. The auto was purchased for $31,000 and will have a 6-year useful life and a $4,300 salvage value. Delivering prescriptions (which the pharmacy has never done before) should increase gross revenues by at least $32,300 per year. The cost of these prescriptions to the pharmacy will be about $25,600 per year. The pharmacy depreciates all assets using the straight-line method. The payback period for the auto is closest to:
Explanation / Answer
A.
Year
Cash inflow
Cash outflow
Net cashflow
Net invested cash
0
31000
-31000
-31000
1
32300
25600
6700
-24300
2
32300
25600
6700
-17600
3
32300
25600
6700
-10900
4
32300
25600
6700
-4200
5
32300
25600
6700
2500
6
4300
0
4300
6800
The table indicates that the real payback period is located somewhere between Year 4 and Year 5. There is $4200 of investment yet to be paid back at the end of Year 4, and there is $6700 of cash flow projected for Year 5. We can assume the payback period to be 4.6 years.
B.
Cost of 150 kg of raw material =150*7.9=1185$
C. 7.60 %
Year
Cash inflow
Cash outflow
Net cashflow
0
190000
-190000
1
60000
28000
32000
2
60000
28000
32000
3
60000
28000
32000
4
60000
28000
32000
5
60000
28000
32000
6
60000
28000
32000
7
60000
28000
32000
8
60000
28000
32000
9
60000
28000
32000
10
79000
28000
51000
Total
149000
% return
7.6
Year
Cash inflow
Cash outflow
Net cashflow
Net invested cash
0
31000
-31000
-31000
1
32300
25600
6700
-24300
2
32300
25600
6700
-17600
3
32300
25600
6700
-10900
4
32300
25600
6700
-4200
5
32300
25600
6700
2500
6
4300
0
4300
6800
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