Beacon Manufacturing, Inc. is planning to buy a new cutting machine. The machine
ID: 2578730 • Letter: B
Question
Beacon Manufacturing, Inc. is planning to buy a new cutting machine. The machine costs $125,000, has an estimated life of ten years and no salvage value. The machine is expected to have the following impact:
Increment revenue............................................................................................ $30,000
Incremental expenses:
Expenses other than depreciation.................................................................... (8,000)
Straight-line depreciation............................................................................... (12,500)
Incremental net income..................................................................................... $9,500
All revenue and expenses other than depreciation will be received or paid in cash. Compute the following for this proposal:
1. What is the annual net cash flow expected from the cutting machine investment? $____________
1. What is the expected payback period of the cutting machine investment? ______ years
2. What is the expected return on average investment associated with the cutting machine? ____________%
3. What is the net present value of the cutting machine discounted at an annual rate of 10%, if the present value of a ten-year $1 annuity discounted at 10% is 6.145? $____________
4. What is the net present value of the cutting machine discounted at an annual rate of 20%, if the present value of a ten-year $1 annuity discounted at 20% is 4.192? $____________
Explanation / Answer
Answer = 1 CALCULATION OF THE ANNUAL NET CASH FLOW FROM THE CUTTING MACHIENE INVESTMENT Increamental Revenue = $ 30,000.00 Less: Expenses $ -8,000.00 Less: Straight Line Depreciation $ -12,500.00 Increamental Net income $ 9,500.00 Add: Depreciation $ 12,500.00 Total Annual Cash Flow $ 22,000.00 Answer = 2 CALCIILATION OF THE PAYBACK PERIOD OF MACHIENE YEARS CASH FLOW CUMULATIVE CASH FLOW 1.00 22,000.00 $ 22,000.00 2.00 22,000.00 $ 44,000.00 3.00 22,000.00 $ 66,000.00 4.00 22,000.00 $ 88,000.00 5.00 22,000.00 $ 1,10,000.00 6.00 22,000.00 $ 1,32,000.00 7.00 22,000.00 $ 1,54,000.00 8.00 22,000.00 $ 1,76,000.00 9.00 22,000.00 $ 1,98,000.00 10.00 22,000.00 $ 2,20,000.00 So, in the year of 6th the whole amount of $ 125,000 is recovered but the whole 6th year is not required we need only $ 15,000 in this year Payback Period = 5 Years + $ 15,000 / $ 22,000 Payback Period = 5 Years + 0.68 Years Payback Period = 5.68 Years Answer =3 ) Tota Retrun from the machiene = Net Income * No. of Years Tota Retrun from the machiene = $ 9,500 X 10 Years Tota Retrun from the machiene = $ 95,000 Retrun on Average inevstment = Total return / Investment Value Retrun on Average inevstment = $ 95,000 / $ 125,000 Retrun on inevstment = 0.76 or 76 % Answer = 4 CALCULATION OF NET PRESENT VALUE IF THE DISCOUNTED RATE OF RETURN = 10% Net Present Value = Annual Cash Flow X Annuity of discounted at 10% Net Present Value = $ 22,000 X 6.145 Net Present Value = $ 135,190 Answer = 5 CALCULATION OF NET PRESENT VALUE IF THE DISCOUNTED RATE OF RETURN = 20% Net Present Value = Annual Cash Flow X Annuity of discounted at 20% Net Present Value = $ 22,000 X 4.192 Net Present Value = $ 92, 224
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.