Section III Please answer the following questions. a. Vextra Corporation is cons
ID: 2501822 • Letter: S
Question
Section III Please answer the following questions.
a. Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows:
Periods
12 Percent
1
0.8929
2
1.6901
3
2.4018
4
3.0373
What is the net present value of the machine (rounded to the nearest whole dollar)?
$(33,410).
$(3,100).
$35,000.
$3,410.
$(1,590).
b. The following data concerns a proposed equipment purchase:
Cost
$144,000
Salvage value
$4,000
Estimated useful life
4 years
Annual net cash flows
$46,100
Depreciation method
Straight-line
The annual average investment amount used to calculate the accounting rate of return is:
$72,000
$70,000
$37,000
$74,000
c. Watson Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?
6.0%.
8.0%.
8.5%.
10.0%.
12.0%.
Periods
12 Percent
1
0.8929
2
1.6901
3
2.4018
4
3.0373
Explanation / Answer
Answer a:
Correct Answer is $(1,590). Net present value of the machine = Present Value of inflow - Present Value of outflows
= 11,000 * 3.0373 - 35,000 = $(1,590)
Answer b:
Annual average investment = Book value at the beginning of year 1 + Book value at the end of useful life / 2
= 144,000 + 0 /2 = $72,000
Answer c:
Accounting rate of return = Annual net income after taxes/ Average investment = 1,500 / (25,000/2) = 12%
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