Marielle Tamayo

2013-43415

BA 115 THY PROBLEM 11-17A (Continuatio

2
Assignment #8

PROBLEM 11-12A
The net present value of exploiting the mineral deposits of the land is $7,928.24. Therefore, the project should not be accepted.
PROBLEM
The
capital 11-13A
budgeting project has a net present value of $101,723.02 and a
simple rate of return of 11.43%. Because it has a positive net present value, the
company may want Casey to pursue the projects; however, because of it has a
lower rate of return compared to the division's current ROI (>20%), Casey may
choose to reject the project.

PROBLEM 11-14A
The net present value of Oakmont Company's investment opportunity is $16,415.79.
PROBLEM 11-18A
PROBLEM 11-15A
1
1 Sales
$ 300,000
Variable expenses
(37,500)
2
Contribution margin
337,500
Fixed expenses
PROBLEM 11-19A
Rent
$ 42,000
Depreciation
16,800
Salaries
70,000
1
Insurance
3,500
2
Utilities
27,000
3
Total fixed expenses
159,300
4
Net operating income
$ 178,200
5
If Mr. Swanson requires a simple rate of return of at least 12%,
2 then he should acquire the franchise because it has a simple rate
of return of 40.95%, which is almost 30% higher than what Mr.
Swanson expects.
Mr. Swanson should acquire the franchise because it has a
3 payback period of 2.10 years which is less than the 4-year
payback period he requires,
PROBLEM 11-20A
PROBLEM 11-16A
1
1 The annual net cost savings promised by the automated welding
machine is $78,500.
2
The automated welding machine's net present value at 16%
2 discount rate is -$49,369; therefore, the machine should not be
purchased.
PROBLEM 11-17A
1 Project No.
Profitability
Index

0.245

0.162

0.204

0.182

PROBLEM 11-17A (Continuation)

Net Present Profitability
Ranking
Value
Index
First
4
1
Second
3
3
Third
2
4
Fourth
1
2

Internal
Rate of
Return
2
1
4
3

I prefer using the project profitability index approach as it only

assumes that funds released from a project can be reinvested at
the discount rate (10%), unlike the internal rate of return which
assumes that funds released can be reinvested at the internal rate
of return shown for the project. Moreover, the profitability index
takes into account the investment needed for the project, unlike
the net present value which only looks at the total amount of net
present value from a project.
PROBLEM 11-18A
The new dipping machine will provide annual net cash inflows of $32,000.
The net present value of the new machine is -$26,495.
PROBLEM 11-19A
Payback period
Net present value
Profitability index
Simple rate of return

Project A
2.83 years
$26,458
0.16
15.29%

Project B
2.92 years
$45,658
0.12
14.21%

Lou's division should pursue Project A because it has better

payback period, profitability index, and simple rate of return than
Project B. Project B may have better NPV but this does not take
into account the higher initial investment also associated with
Project B. Lou should still be cautious, however, in pursuing
Project A as it has a lower simple rate of return than his division's
current and past ROI (>18%).
PROBLEM 11-20A
The annual savings in cash operating costs that would be realized
if the cherry picker were purchased is $21,000.
The simple rate of return expected from the cherry picker is 15%,
therefore, the cherry picker would not be purchased Elberta Fruit
Farm's required rate of return is 16%. However, the simple rate of
return is generally not an accurate guide for investment decisions.
The payback period for the cherry picker is 4.29 years. This meets
Elberta Fruit Farm's payback criterion since its payback period is
less than 5 years.

Year
0
1
2
3
4
New equipment and timber $ (275,000)
Investment in working capit (100,000)
Annual net cash receipts
$ 120,000 $ 120,000 $ 120,000 $ 120,000
Road construction
(40,000)
Salvage value of equipment
65,000
Working capital released
100,000
Total cash flows
$ (375,000) $ 120,000 $ 120,000 $ 80,000 $ 285,000
Discount factor (20%)
1.0000
0.8333
0.6944
0.5787
0.4823
PV of cash flows
### 100,000.00 83,333.33 46,296.30 137,442.13
Net present value
$ (7,928.24)

Year
0
$ (3,500,000)

Purchase of equipment
Sales
Variable expenses
Fixed out-of-pocket costs
Salvage value of equipment
Total cash flows
$ (3,500,000)
Discount factor (16%)
1.0000
PV of cash flows
###
Net present value
$101,723.02

$3,400,000 $3,400,000 $3,400,000 $3,400,000

(1,600,000) (1,600,000) (1,600,000) (1,600,000)
(700,000)
(700,000)
(700,000)
(700,000)
$1,100,000 $1,100,000 $1,100,000 $1,100,000
0.8621
0.7432
0.6407
0.5523
948,275.86 817,479.19 704,723.44 607,520.21

2 Annual incremental net operating income $ 400,000

Divided by: Initial investment
3,500,000
Simple rate of return
11.43%

5
$3,400,000
(1,600,000)
(700,000)
$1,100,000
0.4761
523,724.32

0
$ (130,000)
(60,000)

Year
2

Purchase of equipment
Investment in working capital
Sales revenues
$ 250,000 $ 250,000 $ 250,000 $ 250,000
Variable expenses
(120,000)
(120,000)
(120,000)
(120,000)
Fixed out-of-pocket operating costs
(70,000)
(70,000)
(70,000)
(70,000)
Overhaul of equipment
(8,000)
Salvage value of equipment
12,000
Working capital released
60,000
Total cash flows
$ (190,000) $ 60,000 $ 52,000 $ 60,000 $ 132,000
Discount factor (15%)
1.0000
0.8696
0.7561
0.6575
0.5718
PV of cash flows
### 52,173.91 39,319.47 39,450.97 75,471.43
Net present value
$16,415.79

1 Sales
Variable expenses
Contribution margin
Fixed expenses
Rent
Depreciation
Salaries
Insurance
Utilities
Total fixed expenses
Net operating income

$ 300,000
37,500
262,500
$

42,000
16,800
70,000
3,500
27,000
159,300
$ 103,200

2 Annual incremental net operating incom $ 103,200

Divide by: Initial investment
Cost of new equipment $ 270,000
Less: Salvage value
18,000
252,000
Simple rate of return
40.95%
3 Investment required
$ 252,000
Divide by: Annual net cash inflow
Net operating income $ 103,200
Add: Depreciation
16,800
120,000
Payback period
2.10 years

1 Reduction in labor costs

$ 108,000
Reduction in material costs
6,500
Total cost reductions
114,500
Less: Increased maintenance co
36,000
Annual net cost savings
$ 78,500
2

Year
0
1
2
3
4
Purchase of equipment
$ (250,000)
Software and installation costs
(80,000)
Annual net cost savings
$ 78,500 $ 78,500 $ 78,500 $ 78,500
Cost of replacing parts
(45,000)
Salvage value of old equipment
12,000
Salvage value of new equipment
Total cash flows
$ (318,000) $ 78,500 $ 78,500 $ 33,500 $ 78,500
Discount factor (16%)
1.0000
0.8621
0.7432
0.6407
0.5523
PV of cash flows
### 67,672.41 58,338.29 21,462.03 43,354.85
Net present value
###

78,500 $

78,500

20,000
78,500 $ 98,500
0.4761
0.4104
37,374.87 40,428.56

Project No.
1
2
3
4
Net present value
$ 66,140 $ 72,970 $ 73,400 $ 87,270
Divide by: Investment requir
270,000
450,000
360,000
480,000
Profitability index
0.2450
0.1622
0.2039
0.1818

1 Reduction in annual operating costs

Present hand method $ 30,000
New machine
7,000
Annual savings in operating costs
$
Increased annual contribution margin
6,000 boxes x $1.50
Total annual net cash inflows
$

23,000
9,000
32,000

Year
0
1
2
3
4
2 Purchase of new equipmen $ (120,000)
Cost of replacing parts
$
(9,000)
Annual net cash inflows
$ 32,000 $ 32,000
32,000 $ 32,000
Salvage value of equipment
Total cash flows
$ (120,000) $ 32,000 $ 32,000 $ 23,000 $ 32,000
Discount factor (20%)
1.0000
0.8333
0.6944
0.5787
0.4823
PV of cash flows
### 26,666.67 22,222.22 13,310.19 15,432.10
Net present value
###

5
$

32,000
7,500
$ 39,500
0.4019
15,874.16

Sales
Variable expenses
Contribution margin
Fixed expenses
Depreciation
$
Fixed out-of-pocket operating
Total fixed expenses
Net operating income
1 Investment required
Divide by: Annual net cash inflow
Net operating income
$
Add: Depreciation
Payback period

Product A
$ 250,000
120,000
130,000
34,000
70,000

Product B
$ 350,000
170,000
180,000
$

76,000
50,000

104,000
26,000

$ 170,000
26,000
34,000

126,000
54,000

$ 380,000

$ 54,000
60,000
76,000
2.83 years

130,000
2.92

Year
Project A
Purchase of equipment
Sales
Variable expenses
Fixed out-of-pocket costs
Salvage value of equipment
Total cash flows
Discount factor (16%)
PV of cash flows
Net present value
Project B
Purchase of equipment
Sales
Variable expenses
Fixed out-of-pocket costs
Salvage value of equipment
Total cash flows
Discount factor (16%)
PV of cash flows
Net present value

0
$ (170,000)

$ 250,000 $ 250,000 $ 250,000

(120,000)
(120,000)
(120,000)
(70,000)
(70,000)
(70,000)
$ (170,000) $ 60,000 $ 60,000 $ 60,000
1.0000
0.8621
0.7432
0.6407
### 51,724.14 44,589.77 38,439.46
$26,457.62
$ (380,000)
$ 350,000 $ 350,000 $ 350,000
(170,000)
(170,000)
(170,000)
(50,000)
(50,000)
(50,000)
$ (380,000) $ 130,000 $ 130,000 $ 130,000
1.0000
0.8621
0.7432
0.6407
### 112,068.97
96,611.18 83,285.50
$45,658.17

Net present value

Divide by: Investment required
Profitability index

Project A
Project B
$ 26,458 $ 45,658
170,000
380,000
0.1556
0.1202

Annual net operating income

Divided by: Initial investment
Simple rate of return

Project A
Project B
$ 26,000 $ 54,000
170,000
380,000
15.29%
14.21%

years

r
4

$ 250,000 $ 250,000
(120,000)
(120,000)
(70,000)
(70,000)
$ 60,000 $ 60,000
0.5523
0.4761
33,137.47 28,566.78

$ 350,000 $ 350,000
(170,000)
(170,000)
(50,000)
(50,000)
$ 130,000 $ 130,000
0.5523
0.4761
71,797.84 61,894.69

1 Labor savings
$
Less: Out-of-pocket costs
Operator and assistant
$ 14,000
Insurance
200
Fuel
1,800
Maintenance contract
3,000
Annual savings in cash operating costs
$

40,000

19,000
21,000

2 Annual savings in cash operating costs

$
Less: Depreciation
Annual incremental net operating income
Divide by: Initial investment
Cost of new equipment
$ 94,500
Less: Salvage value
4,500
Simple rate of return

90,000
15.00%

3 Investment required
Divide by: Annual net cash inflow
Payback period

90,000
21,000
4.29 years

21,000
7,500
13,500