menu
bartleby
search
close search
Hit Return to see all results
close solutoin list

Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost $9,000,000 and last 10 years. The company’s cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchased—even if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of $1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of $300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the company’s decision?

BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 19, Problem 15E
Textbook Problem
45 views

Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows:

Chapter 19, Problem 15E, Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided

The system will cost $9,000,000 and last 10 years. The company’s cost of capital is 12 percent.

Required:

  1. 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired?
  2. 2. Calculate the NPV and IRR for the project. Should the system be purchased—even if it does not meet the payback criterion?
  3. 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of $1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of $300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the company’s decision?

1.

To determine

Calculate the payback period for the given system and state whether system would be acquired or not.

Explanation of Solution

Payback period: Payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the proposal of long-term investment (fixed assets) of the business. But payback method has high risk than other method, because it does not follow the time value of money concept in valuing the cash inflows.

Calculate the payback period for the given system and state whether system would be acquired or not as follows:

When the estimated annual net cash is equal (even cash flow), the cash payback period is calculated as below:

PaybackPeriod=Amount to be investedEstimated annual net cash inflow =$9,000,000$1,500,000 (1)=6.00years

Working note (1):

Calculate the annual cash flow of the investment

2.

To determine

Calculate the net present value (NPV) and internal rate of return (IRR) for the given project, and indicate whether the given project is better for the investment or not.

3.

To determine

Recalculate the payback period, net present value and internal rate of return of the project based on the given changes.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Show all chapter solutions
add
Ch. 19 - What are the principal tax implications that...Ch. 19 - Explain why the MACRS method of recognizing...Ch. 19 - Explain the important factors to consider for...Ch. 19 - Explain what a postaudit is and how it can provide...Ch. 19 - Explain what sensitivity analysis is. How can it...Ch. 19 - Jan Booth is considering investing in either a...Ch. 19 - WeCare Clinic is planning on investing in some new...Ch. 19 - Carsen Sorensen, controller of Thayn Company, just...Ch. 19 - Manzer Enterprises is considering two independent...Ch. 19 - Keating Hospital is considering two different...Ch. 19 - Warren Company plans to open a new repair service...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - The following cases are each independent of the...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - Roberts Company is considering an investment in...Ch. 19 - NPV A clinic is considering the possibility of two...Ch. 19 - Refer to Exercise 19.11. 1. Compute the payback...Ch. 19 - Buena Vision Clinic is considering an investment...Ch. 19 - Consider each of the following independent cases....Ch. 19 - Gina Ripley, president of Dearing Company, is...Ch. 19 - Covington Pharmacies has decided to automate its...Ch. 19 - Postman Company is considering two independent...Ch. 19 - Lilly Company is planning to buy a set of special...Ch. 19 - An investment of 2,000 produces a net cash flow of...Ch. 19 - Which of the following is a deficiency of the...Ch. 19 - Assume there are two competing projects, X and Y....Ch. 19 - Thomas Company is investing 10,000 in a project...Ch. 19 - Assume that an investment of 100,000 produces a...Ch. 19 - Heaps Company produces jewelry that requires...Ch. 19 - Sweeney Manufacturing has a plant where the...Ch. 19 - Ron Booth, the CEO for Sunders Manufacturing, was...Ch. 19 - Kent Tessman, manager of a Dairy Products...Ch. 19 - Friedman Company is considering installing a new...Ch. 19 - Okmulgee Hospital (a large metropolitan for-profit...Ch. 19 - Mallette Manufacturing, Inc., produces washing...Ch. 19 - Jonfran Company manufactures three different...Ch. 19 - Brindon Thayn, president and owner of Orangeville...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions add
What are some differences in the analysis for a replacement project versus that for a new expansion project?

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)