1.) Wayne Company is considering a long-term investment project called ZIP. ZIP

Question

1.) Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $131,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,500, and annual cash outflows would increase by $40,900. Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.)

2.) Linkin Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $55,700. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,600. At the end of 8 years the company will sell the truck for an estimated $28,500. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.

Compute the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal places, e.g. 125. Round answer for Payback period to 1 decimal place, e.g. 10.5. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

3.) Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $261,000. A new salon will normally generate annual revenues of $63,650, with annual expenses (including depreciation) of $40,200. At the end of 15 years the salon will have a salvage value of $74,000. Calculate the annual rate of return on the project. (Round answer to 0 decimal places, e.g. 125.)

Explanation / Answer

Solution 1:

Payback period is the Initial investment divided by the net cash flow.

Here, cash outflow is 40,900

Cash Inflow is 80,500

So net cash flow each year is $39,600

So payback period is 131,000/39,600 = 3.31 years

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