Project Mary Project Winnie Project Sarah Annual net income: Depreciation is computed by the straight-line method with no salvage value.. LO 2, 3, 8, AN Compute annual rate of return, c
Trang 1P12-1B The Borders and Noble partnership is considering three long-term capital
invest-ment proposals Each investinvest-ment has a useful life of fi ve years Relevant data on each
project are as follows
Project Mary Project Winnie Project Sarah
Annual net income:
Depreciation is computed by the straight-line method with no salvage value The
com-pany’s cost of capital is 12% (Assume cash fl ows occur evenly throughout the year.)
Instructions
(a) Compute the cash payback period for each project (Round to two decimals.)
(b) Compute the net present value for each project (Round to nearest dollar.)
(c) Compute the annual rate of return for each project (Round to two decimals.)
(Hint: Use average annual net income in your computation.)
(d) Rank the projects on each of the foregoing bases Which project do you recommend?
P12-2B Ben Paul is an accounting major at a western university located approximately
60 miles from a major city Many of the students attending the university are from the
metropolitan area and visit their homes regularly on the weekends Ben, an entrepreneur
at heart, realizes that few good commuting alternatives are available for students doing
weekend travel He believes that a weekend commuting service could be organized and
run profi tably from several suburban and downtown shopping mall locations Ben has
gathered the following investment information
1 Five used vans would cost a total of $90,000 to purchase and would have a three-year
useful life with negligible salvage value Ben plans to use straight-line depreciation
2 Ten drivers would have to be employed at a total payroll expense of $43,000
3 Other annual out-of-pocket expenses associated with running the commuter service
would include Gasoline $26,000, Maintenance $4,000, Repairs $5,300, Insurance
$4,500, and Advertising $2,200
4 Ben desires to earn a return of 15% on his investment
5 Ben expects each van to make 10 round trips weekly and carry an average of six
stu-dents each trip The service is expected to operate 32 weeks each year, and each student
will be charged $15 for a round-trip ticket
Instructions
(a) Determine the annual (1) net income and (2) net annual cash fl ows for the commuter
service
(b) Compute (1) the cash payback period and (2) the annual rate of return (Round to two
decimals.)
(c) Compute the net present value of the commuter service (Round to the nearest dollar.)
(d) What should Ben conclude from these computations?
CHAPTER 12—PROBLEMS: SET B
(b) M $(3,018); S $(3,075)
(a) (1) $29,000 (b) (1) 1.53 years
Compute annual rate of return, cash payback, and net present value.
(LO 2, 3, 8), AN
Compute annual rate of return, cash payback, and net present value.
(LO 2, 3, 8), AN
P-1
Trang 2P12-3B Platteville Eye Clinic is considering investing in new optical-scanning equip-ment It has two options: Option A would have an initial lower cost but would require
a signifi cant expenditure for rebuilding after three years Option B would require no rebuilding expenditure, but its maintenance costs would be higher Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life The following estimates were made of the cash fl ows The company’s cost of capital is 11%
Instructions
(a) Compute the (1) net present value, (2) profi tability index, and (3) internal rate of
return for each option (Hint: To solve for internal rate of return, experiment with
alternative discount rates to arrive at a net present value of zero.) (b) Which option should be accepted?
P12-4B Isaac’s Auto Repair is considering the purchase of a new tow truck The garage doesn’t currently have a tow truck, and the $65,000 price tag for a new truck would repre-sent a major expenditure for the garage Isaac Mayer, owner of the garage, has compiled the following estimates in trying to determine whether to purchase the truck
Net annual cash infl ows from towing $9,600
Isaac’s good friend, Brad Jolie, stopped by He is trying to convince Isaac that the tow truck will have other benefi ts that Isaac hasn’t even considered First, he says, cars that need towing need to be fi xed Thus, when Isaac tows them to his facility his repair revenues will increase Second, he notes that the tow truck could have a plow mounted on it, thus saving Isaac the cost of plowing his parking lot (Brad will give him a used plow blade for free if Isaac will plow Brad’s driveway.) Third, he notes that the truck will generate goodwill; that
is, people who are rescued by Isaac and his tow truck will feel grateful and might be more inclined to use his service station in the future or buy gas there Fourth, the tow truck will have “Isaac’s Auto Repair” on its doors, hood, and back tailgate—a form of free advertising wherever the tow truck goes
Brad estimates that, at a minimum, these benefi ts would be worth the following Additional annual net cash fl ows from repair work $2,600
Additional annual net cash fl ows from customer “goodwill” 1,200 Additional annual net cash fl ows resulting from free advertising 500 The company’s cost of capital is 10%
Instructions
(a) Calculate the net present value, ignoring the additional benefi ts described by Brad Should the tow truck be purchased?
(b) Calculate the net present value, incorporating the additional benefi ts suggested by Brad Should the tow truck be purchased?
(c) Suppose Brad has been overly optimistic in his assessment of the value of the ad-ditional benefi ts At a minimum, how much would the adad-ditional benefi ts have to be worth in order for the project to be accepted?
(a) NPV $(11,102)
(b) NPV $15,039
(a) (1) NPV A $(3,376)
(3) IRR B 12%
Compute net present value
considering intangible benefi ts.
(LO 3, 4), E
Compute net present value,
profi tability index, and
internal rate of return.
(LO 3, 5, 7), AN
P-2 Problems: Set B
Trang 3P12-5B Lewis Corp is thinking about opening a basketball camp in Texas In order to
start the camp, the company would need to purchase land and build eight basketball
courts and a dormitory-type sleeping and dining facility to house 110 basketball players
Each year, the camp would be run for eight sessions of one week each The company
would hire college basketball players as coaches The camp attendees would be male and
female basketball players ages 12 to 18 Property values in Texas have enjoyed a steady
increase in value It is expected that after using the facility for 20 years, Lewis can sell the
property for more than it was originally purchased for The amounts shown on the next
page have been estimated
Annual cash infl ows assuming 110 players and eight weeks $700,000
Instructions
(a) Calculate the net present value of the project
(b) To gauge the sensitivity of the project to these estimates, assume that if only 90 campers
attend each week, annual cash infl ows will be $570,000 and annual cash outfl ows will
be $508,000 What is the net present value using these alternative estimates? Discuss
your fi ndings
(c) Assuming the original facts, what is the net present value if the project is actually
riskier than fi rst assumed, and a 15% discount rate is more appropriate?
(d) Assume that during the fi rst fi ve years the annual net cash infl ows each year were only
$65,000 At the end of the fi fth year, the company is running low on cash, so
manage-ment decides to sell the property for $668,000 What was the actual internal rate of
return on the project? Explain how this return was possible given that the camp did
not appear to be successful
(a) NPV $493,596
(d) IRR 15%
Compute net present value and internal rate of return with sensitivity analysis.
(LO 3, 7), E
Problems: Set B P-3