Financial Accounting Rate Of Return Question And Answers Homework Help
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1.Buscho Industries is considering one of two investment options. Option 1 is a $45,000 investment in new blending equipment that is expected to produce equal annual cash flows of $18,000 for each of eight years. Option 2 is a $17,000 investment in a new computer system that is expected to produce equal annual cash flows (savings) of $10,000 for each of four years. The residual value of the blending equipment at the end of the fourth year is estimated to be $5,000. The computer system has no expected residual value at the end of the fourth year.
Assume there is sufficient capital to fund only one of the projects. Determine which project should be selected, comparing the (a) net present values and (b) present value indices of the two projects, assuming a minimum rate of return of 12%. Round the present value index to two decimal places.
2.Fireproofing Solutions Inc. is considering the purchase of automated machinery that is expected to have a useful life of eight years and no residual value. The average rate of return on the average investment has been computed to be 15%, and the cash payback period was computed to be ten years.
Do you see any reason to question the validity of the data presented? Explain.
3.The internal rate of return method is used by Premier Construction Co. in analyzing a capital expenditure proposal that involves an investment of $41,575 and annual net cash flows of $12,500 for each of the six years of its useful life.
a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return.
b. Using the factor determined in part (a) and the present value of an annuity of $1 table appearing in this chapter, determine the internal rate of return for the proposal.
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4.Strahn Foods Inc. is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $65,970 and could be used to deliver an additional 90,000 bags of taquitos chips per year. Each bag of chips can be sold for a contribution margin of $0.35. The delivery truck operating expenses, excluding depreciation, are $0.55 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $35,890. The new machine would require 2.5 fewer hours of direct labor per day. Direct labor is $20 per hour. There are 240 operating days in the year. Both the truck and the bagging machine are estimated to have five-year lives. The minimum rate of return is 14%. However, Strahn Foods has funds to invest in only one of the projects.
a. Compute the internal rate of return for each investment. Use the table of present values of an annuity of $1 in the chapter.
b. Provide a memo to management with a recommendation.
5.Glacier Transportation Inc. is considering a distribution facility at a cost of $8,000,000. The facility has an estimated life of 10 years and a $2,000,000 residual value. It is expected to provide yearly net cash flows of $1,600,000. The company’s minimum desired rate of return for net present value analysis is 10%. Compute the following:
a. The average rate of return, giving effect to straight-line depreciation on the investment.
b. The cash payback period.
c. The net present value. Use the table of the present value of an annuity of $1 appearing in this chapter. Round to the nearest dollar.
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