Concept explainers
Problem 10-19A Using
Dwight Donovan, the president of Donovan Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $400,000 and for Project B are $160,000. The annual expected
Required
- a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? Round your computations to two decimal points.
- b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach? Round your rates to six decimal points.
- c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?
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- question 18 Nirvana Chip Designs has finished designing its next generation of chips, the XJ5000 series and is getting ready to start production. As the analyst on the project, you are required to prepare pro forma free cash flows. Which of the following are relevant to your analysis? a. Design cost for the chips b. Potential lost sales of the XJ4000 chips c. Proportional cost of the corporate jet lease d. Start-up investment in raw materials e. Upgrades to the chip fabrication facility required if the chip is produced f. Market research done to guide the development of the new chip g. Market value of land and buildings where new chip will be produced 1. Design cost for the chips. (Select the best choice below.) A. This is relevant because it is an investment in working capital. B. This is relevant as it represents cannibalization of existing sales. C. This is irrelevant because it is a sunk cost. D. This is irrelevant as it represents existing overhead.…arrow_forwardAppendix Four (Equipment Replacement Decision)Objective: The proposed manufacturing plant has a food packaging equipment. The analysis would provide Jacob with decision support as to use that equipment or procure a new one. Scenario:The current equipment was purchased eight years ago for $ 750,000 and has eight useful years remaining. The new machine will cost $ 380,000 and will have the same useful life remaining as the old machine and will have zero disposal value. Currently the annual operating cost is $ 110,000 and will reduce by 50% if the new equipment is purchased. If the new equipment is procured, it will need to be shut down once a year for maintenance purposes. Opportunity cost of the shut down period is as follows:• $ 6,000 in each of the years 1-3• $ 8,000 in each of the years 4 and 5• $ 10,000 in each of the years 6 and 7The old equipment will have limited use and can only fetch $ 120,000 when disposed off at this time.Methodology:The group would calculate the net…arrow_forwardQuestion 2:ABC Company has two projects:A: It is considering to purchase an equipment to be attached with the main manufacturing machine. Theequipment will cost $6,000 and will have annual cash inflow by $2,200. The life of the equipment is 6 years.After 6 years, it will have no salvage value. The management wants a 20% return on all investments.B: It is planning to reduce its labor costs by automating a critical task that is currently performed manually.The cost to purchase a new machine is $15,000. The installation of machine can reduce annual labor cost by$4,200. The life of the machine is 15 years. The salvage value of the machine after fifteen years will be zero.The required rate of return of Smart Manufacturing Company is 25%.a) Will you go ahead with this project A? Explain.b) Will you go ahead with this project B? Explain.c) What about if these two projects are two mutually exclusive ones?d) Will IRR and NPV always give you the same results?arrow_forward
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