ch21 sample questions

1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value(NPV) warrant the investment in the machine?

What is the projected balance in Paid-in Capital at the end of each year for the 5 years 1986 through 1990?

a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?

Now we want to examine the analysis business report concerning the cost of capital that has been increased at 28% in accordance with the Net Present Value which is $500,000 the question being would still be worth it to make the investment to the company (Needles, 2010). While at the same time the internal rate of return is still at 21% which is lower than the 25% in the expenditures. In reflection of these calculations the investment would not

The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

(b) Suppose an investor has a $16 million investment in the stock of firm B. What alternative $16 million

Central Embroidery needs to purchase a new monogram machine and is considering two options. The first machine costs $100,000 and is expected to last 5 years, and the second machine costs $160,000 and is expected to last 8 years. Assume that the opportunity cost of capital is 8 percent. Which machine should Central Embroidery purchase?

c. What is the future value if the payments are invested with the First National Bank, which

When we look at 75% occupancy, the rate of return (net earnings divided by amount invested) is $298,000/$3,525,000 = 8.4%. . This return should be regarded as low; as the

ML had developed a policy of selling manual machines and renting automatic machines. Manual machines did not cost much, did not require service, and could be modified to attach different fasteners inexpensively. Automatic machines were rented on an annual basis because they would have been more expensive to sell and it provided annual income to ML. However, about 700 of the rented machines were returned each year. During the time that machines were in inventory, ML would modify the machines to attach different fasteners. This was expensive with an average cost per modification of $2000. If all 700 machines were modified during a given year this would have cost $1.4 million per year. It was also industry practice to provide preventative maintenance and

10. (Q. 14 in B) The profitability index for a project costing $40,000 and returning

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.

 Under IRR it is assumed that all the intermediate cash flows are reinvested at

Task 7 On 1 April 2009 a business purchased a machine costing RM 112,000. The machine can be used for a total of 20,000 hours over an estimated life of 48 months. At the end of that time the machine is expected to have a trade-in value of RM 12,000. The financial year of the business ends on 31 December each year. It is expected that the machine will be used for: 4,000 hours during the financial year ending 31 December 2009 5,000 hours during the financial year ending 31 December 2010 5,000 hours during the financial year ending 31 December 2011 5,000 hours during the financial year ending 31 December 2012 1,000 hours during the financial year ending 31 December 2013 Required: (a) Calculate the annual depreciation charges on the machine on each of the following bases for each of the financial years ending on 31 December 2009, 2010, 2011, 2012 and 2013: (i) the straight line method applied on a month for month basis, (ii) the diminishing balance method at 40% per annum applied on a full year basis, and (iii)the units of output method. (b) Suppose that during the financial year ended 31 December 2010 the machine was used for only 1,500 hours before being sold for RM 80,000 on June. Assuming that the business has chosen to apply the