Reference no: EM133075636
Assignment - Capital Budgeting Practice Problems
1. Assume you are given the following information regarding a point-of-sale computer terminal: The net annual savings was calculated to be $1,400 on an average investment cost of $5,620. What is the accounting rate of return (ARR) on the terminal?
2. Information is provided on two machines, which had an original cost of $28,400 for Machine X and $26,200 for Machine Y.
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Machine X
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Machine Y
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Net Annual Savings
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$1,440
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$3,560
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Add: Depreciation
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$4,840
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$5,240
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Net Annual Cash Savings
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$6,280
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$8,800
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a. Which is the best investment using the payback period method?
b. Will either of the machines provide the cash investment back in less than 4 years?
3. Investment in an item of equipment is $22,000. It has a five-year life and no salvage value and straight-line depreciation is used. The equipment is expected to provide an annual savings of $2,900, which does not include depreciation. What is the payback period?
4. You have the following information about three point of sale systems on the market. The owner of a restaurant asks for your help in deciding which of the three machines to buy.
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Adamo
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Sitaara
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Ensolarado
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Cash Investment
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$6,300
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$6,000
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$6,700
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Estimated Machine Life
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5 Years
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5 Years
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5 Years
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Estimated Trade in Value after 5 years
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500
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0
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300
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Annual Operating Costs (does not include depreciation)
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400
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300
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300
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Annual Savings Before Deduction of Costs
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$2,000
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$2,000
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$2,000
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Assume a 30% income tax rate and straight-line depreciation.
a) Use the ARR method to decide which of the three POS systems would be the best investment.
b) If the restaurant wants a return on investment (ROI) of at least 10%, what would you advise?
c) What is the payback period for each POS system.