Reference no: EM132260543

Question 1:

Takhini Hot Springs Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are:

Increased revenues	$20,000	$63,000
Increased expenses:	9,000
Salary of additional operator
Supplies
Depreciation 12,000
Maintenance	4,000	45,000
Increased net income		$18,000

Required:

1) What is the payback period on the new equipment?

2) What is the simple rate of return on the new equipment?

Question 2:

Grey Mountain Summit Company is considering starting a small catering business in Whitehorse. The company would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $35,000 per year. Bree, a Business student at YU and part time employee at Grey Mountain, indicates that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. Bree wants to operate the catering business for only six years. She estimates that the equipment could be sold at that time for 4% of its original cost. Bree uses a 16% discount rate. (Ignore income taxes in this problem.)

Required:

1) Would you advise Bree to make this investment? Use Net Present Value and Profitability analysis to support your decision.

Description	Years	Amount	16% Factor	Present Value
Van & equipment	0	($125,000)	1.000	($125,000)
Working capital	0	($60,000)	1.000	($60,000)

Building rent	1-6	($35,000)	3.685	($128,975)
Net annual cash
inflow	1-6	$80,000	3.685	$294,800
Salvage values,
Equipment	6	$5,000	0.410	$2,050
Release of working
capital	6	$60,000	0.410	$24,600
Net Present Value				$7,475

Question 3:

Carcross Company is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful life. The machine will cost $83,150 and has no salvage value. The machine has a 20% internal rate of return. (Ignore income taxes in this problem.)

Required:

1) What is the annual cost savings promised by the machine?

Question 4:

Consider each of the following situations independently.

1) Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 20% discount rate.

Year	Investment X	Investment Y
1	$500	2,000
2	1,000	1,500
3	1,500	1,000
4	2,000	5,00
Total	$5,000	$5,000

2) At the end of three years, when you graduate from college, your father has promised to give you a used car that will cost $22,000. What lump sum must he invest now to have the $22,000 at the end of three years if he can invest money at

a. 5%?

b. 8%?

3) Mark has just won the grand prize on the Wheel ‘n' Deal quiz show. He has a choice between (a) receiving $400,000 immediately and (b) receiving $60,000 per year for eight years plus a lump sum of $150,000 at the end of the eight-year period. If Mark can get a return of 10% on his investments, which option would you recommend that he accept? (Use present value analysis, and show all computations.)

4) You have just learned that you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance:

a. You may receive $50,000 immediately.

b. You may receive $80,000 at the end of six years.

c. You may receive $12,000 at the end of each year for six years (a total of $72,000).

If you can invest money at a 12% return, which option would you prefer?

Attachment:- Questions.rar