Essay: Tranter, Inc., is considering a project
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Essay
- Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,500,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:
All of the above items, except for depreciation, represent cash flows. The company’s required rate of return is 12%.
Required:
(a.) Compute the project’s net present value.
(b.) Compute the project’s payback period.
(c.) Compute the project’s simple rate of return.
- Five years ago, the City of Paranoya spent $30,000 to purchase a computerized radar system called W.A.S.T.E. (Watching Aliens Sent To Earth). Recently, a sales rep from W.A.S.T.E. Radar Company told the city manager about a new and improved radar system that can be purchased for $50,000. The rep also told the manager that the company would give the city $10,000 in trade on the old system. The new system will last 10 years. The old system will also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the following information to use in the decision as to which system is more desirable:
Required:
(a.) What is the City of Paranoya’s net present value for the decision described above? Use the total cost approach.
(b.) Should the City of Paranoya purchase the new system or keep the old system?
- The following data concern an investment project:
The working capital will be released for use elsewhere at the conclusion of the project.
Required:
Compute the project’s net present value.
- Five years ago, Joe Sarver purchased 600 shares of 9%, $100 par value preferred stock for $75 per share. Sarver received dividends on the stock each year for five years, and finally sold the stock for $90 per share. Instead of purchasing the preferred stock, Sarver could have invested the funds in a money market certificate yielding a 16% rate of return.
Required:
Determine whether or not the preferred stock provided at least the 16% rate of return that could have been received on the money market certificate.
- Big Blue Co. is considering three investment opportunities having cash flows as described below:
Project I would require an immediate cash outlay of $10,000 and would result in cash savings of $3,000 each year for 8 years.
Project II would require cash outlays of $3,000 per year and would provide a cash inflow of $30,000 at the end of 8 years.
Project III would require a cash outlay of $10,000 now and would provide a cash inflow of $30,000 eight years from now.
Required:
If Big Blue has a required rate of return of 14%, determine which, if any, of the three projects is acceptable. Use the NPV method.
- Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost $375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of year 6. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $85,000 per year for each of the 10 years. Axillar’s discount rate is 16%.
Required:
(a.) What is the net present value of this investment opportunity?
(b.) Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo?
- Lajara Inc. has provided the following data concerning a proposed investment project:
The company uses a discount rate of 13%.
Required:
Compute the net present value of the project.
- Burba Inc. is considering investing in a project that would require an initial investment of $200,000. The life of the project would be 8 years. The annual net cash inflows from the project would be $60,000. The salvage value of the assets at the end of the project would be $30,000. The company uses a discount rate of 17%.
Required:
Compute the net present value of the project.
- Grossett Corporation has provided the following data concerning a proposed investment project:
The company uses a discount rate of 10%. The working capital would be released at the end of the project.
Required:
Compute the net present value of the project.
- Woolfolk Corporation is considering investing $210,000 in a project. The life of the project would be 9 years. The project would require additional working capital of $46,000, which would be released for use elsewhere at the end of the project. The annual net cash inflows would be $42,000. The salvage value of the assets used in the project would be $32,000. The company uses a discount rate of 17%.
Required:
Compute the net present value of the project.
- Swaggerty Company is considering purchasing a machine that would cost $462,000 and have a useful life of 7 years. The machine would reduce cash operating costs by $115,500 per year. The machine would have no salvage value.
Required:
(a.) Compute the payback period for the machine.
(b.) Compute the simple rate of return for the machine.
- Alesi Company is considering purchasing a machine that would cost $243,600 and have a useful life of 8 years. The machine would reduce cash operating costs by $76,125 per year. The machine would have a salvage value of $60,900 at the end of the project.
Required:
(a.) Compute the payback period for the machine.
(b.) Compute the simple rate of return for the machine.
- Yeung Corporation is considering the purchase of a machine that would cost $330,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $33,000. The machine would reduce labor and other costs by $86,000 per year. The company requires a minimum pretax return of 12% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
- The management of Glasco Corporation is considering the purchase of a machine that would cost $270,000, would last for 8 years, and would have no salvage value. The machine would reduce labor and other costs by $63,000 per year. The company requires a minimum pretax return of 18% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
- Lovan, Inc., is considering the purchase of a machine that would cost $450,000 and would last for 8 years, at the end of which, the machine would have a salvage value of $63,000. The machine would reduce labor and other costs by $76,000 per year. Additional working capital of $3,000 would be needed immediately, all of which would be recovered at the end of 8 years. The company requires a minimum pretax return of 8% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
- Dimpson Corporation is considering the following three investment projects:
Required:
Rank the investment projects using the profitability index. Show your work!
- The management of Grayer Corporation is considering the following three investment projects:
The only cash outflows are the initial investments in the projects.
Required:
Rank the investment projects using the profitability index. Show your work!
- Flamio Corporation is considering a project that would require an initial investment of $210,000 and would last for 6 years. The incremental annual revenues and expenses for each of the 6 years would be as follows:
At the end of the project, the scrap value of the project’s assets would be $24,000.
Required:
Determine the payback period of the project. Show your work!
- The management of Sobus Corporation is considering a project that would require an initial investment of $458,000 and would last for 9 years. The annual net operating income from the project would be $58,000, including depreciation of $48,000. At the end of the project, the scrap value of the project’s assets would be $26,000.
Required:
Determine the payback period of the project. Show your work!
- Shiffler Corporation is contemplating purchasing equipment that would increase sales revenues by $246,000 per year and cash operating expenses by $133,000 per year. The equipment would cost $275,000 and have a 5 year life with no salvage value. The annual depreciation would be $55,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
- The management of Moya Corporation is investigating purchasing equipment that would cost $336,000 and have an 8 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $288,000 per year and cash operating expenses by $164,000 per year.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
- Hinck Corporation is investigating automating a process by purchasing a new machine for $520,000 that would have an 8 year useful life and no salvage value. By automating the process, the company would save $134,000 per year in cash operating costs. The company’s current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $65,000.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!
- The management of Kleppe Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $19,000. The new machine would cost $180,000, would have a 9 year useful life, and would have no salvage value. By automating the process, the company would save $30,000 per year in cash operating costs.
Required:
Determine the simple rate of return on the investment to the nearest tenth of a percent. Show your work!