Concept explainers
Henries Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation, Henries estimated the new machine would increase the company’s
Required:
1. What is the machine’s internal rate of return to the nearest whole percent?
2. Using a discount rate of 14%, what is the machines net present value? Interpret your results.
3. Suppose the new machine would increase the company’s ua1 cash inflows, net of expenses, by only $37,150 per year. Under these conditions, what is the internal rate of return to the nearest whole percent?
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Introduction To Managerial Accounting
- Average rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 125,000 with a 15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of 28,000 per year. In addition, the equipment will have operating and energy costs of 5,150 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.arrow_forwardNet present value methodannuity for a service company Amenity Hotels Inc. is considering the construction of a new hotel for 50 million. The expected life of the hotel is 25 years, with no residual value. The hotel is expected to earn revenues of 30 million per year. Total expenses, including depreciation, are expected to be 23 million per year. Amenity Hotels management has set a minimum acceptable rate of return of 14%. a. Determine the equal annual net cash flows from operating the hotel. b. Compute the net present value of the new hotel, using the present value of an annuity table found in Appendix A. Round to the nearest million dollars. c. Does your analysis support construction of the new hotel? Explain.arrow_forwardREPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings from 24,000 to 46,000 per year. The new machine will cost 80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firms WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.arrow_forward
- Net Present Value, Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is 235. Annual operating costs of the aircraft follow: The aircraft will cost 120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes. Required: 1. Calculate the NPV for the aircraft. Should the company buy it? 2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased? 3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent. 4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.arrow_forwardAn auto repair company needs a new machine that will check for defective sensors. The machine has an Initial investment of $224,000. Incremental revenues, including cost savings, are $120,000, and Incremental expenses, including depreciation, are $50,000. There is no salvage value. What is the accounting rate of return (ARR)?arrow_forwardA mini-mart needs a new freezer and the initial Investment will cost $300,000. Incremental revenues, including cost savings, are $200,000, and incremental expenses, including depreciation, are $125,000. There is no salvage value. What is the accounting rate of return (ARR)?arrow_forward
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