Reference no: EM132941377

Questions -

Q1) Your company is planning to purchase a new log splitter for its lawn and garden business. The new splitter has an initial investment of $228,000. It is expected to generate $30,000 of annual cash flows, provide incremental cash revenues of $194,524, and incur incremental cash expenses of $130,000 annually. What is the payback period and accounting rate of return (ARR)?

Q2) Pompeii's Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii's has put together the following budgetary items:

Present Car New Car

Purchase cost new $32,000

Transmission and other repairs $9,000

Annual cash operating cost 12,000 11,000

Fair market value now 6,000

Fair market value in five years 500 6000

If Pompeii's replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they sell the old vehicle and purchase a new vehicle, they will use that vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient and the maintenance on a new car is less. This project is analyzed using a discount rate of 12%. Calculate the NPV on both Cars.

Q3) Allant Sports is considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows:

Year 1 $(62,000)

Year 2 $139,000

Year3 $21000

Year 4 $131000

A. Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility if the required rate of return is 8%.