Hardev Dwight Donovan, the president of Vernon Enterprises, is considering two investment opportunities. Because of limited resources, hewill be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine isexpected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills ofemployees operating the current equipment. Initial cash expenditures for Project A are $108,000 and for Project B are $35,000. Theannual expected cash inflows are $41,719 for Project A and $11,523 for Project B. Both investments are expected to provide cash flowbenefits for the next four years. Vernon Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1)Note: Use appropriate factor(s) from the tables provided.Requireda. Compute the net present value of each project. Which project should be adopted based on the net present value approach?b. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of returnapproach?

Project A:Initial capital expenditure = $108,000Annual expected cash inflow = $41,719Project…

Answered: Dwight Donovan, the president of Vernon…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

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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 companys 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 purchasedeven 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 companys decision?
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?
Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?
Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is 2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the projects payback period. 2. Compute the projects accounting rate of return. 3. Compute the projects net present value, assuming a required rate of return of 10 percent. 4. Compute the projects internal rate of return.
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8%, and the projects’ expected net costs are listed in the following table: What is the IRR of each alternative? What is the present value of the costs of each alternative? Which method should be chosen?
Dwight Donvan, the president of Munoz enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only 1 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 $114, 000 and for project, B is $43,000. The annual expected cash inflows are $44,037 for project A and $13,565 for project B. Both investments are expected to provide cash flow benefits for the next four years. Munoz Enterprises' desired rate is 8 percent. A. Commute the net present value of each project. B. Commute the approximate internal rate of each project.
Dwight Donovan, the president of Perez 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 five 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 $103,000 and for Project B are $48,000. The annual expected cash inflows are $26,481 for Project A and $13,982 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Perez Enterprises’ desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required Compute the net present value of each project. Which project should be adopted based on the net present value approach? Compute the approximate internal rate…
Dwight Donovan, the president of Fanning 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 $116,000 and for Project B are $36,000. The annual expected cash inflows are $44,810 for Project A and $12,355 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Fanning Enterprises’ desired rate of return is 8 percent.
Dwight Donovan, the president of Benson 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 five 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 $103,000 and for Project B are $47,000. The annual expected cash inflows are $26,481 for Project A and $13,690 for Project benefits for the next five years. Benson Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Both investments are expected to provide cash flow Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate internal…
Dwight Donovan, the president of Benson 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 five 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 $103,000 and for Project B are $47,000. The annual expected cash inflows are $26,481 for Project A and $13,690 for Project B. Both investments are expected to provide cash flow benefits for the next five years. Benson Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate internal…
Dwight Donovan, the president of Franklin 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 $105,000 and for Project B are $49,000. The annual expected cash inflows are $40,560 for Project A and $15,458 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Franklin Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate…
Dwight Donovan, the president of Franklin 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 three 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 $110,000 and for Project B are $33,000. The annual expected cash inflows are $52,220 for Project A and $14,214 for Project B. Both investments are expected to provide cash flow benefits for the next three years. Franklin Enterprises' desired rate of return is 8 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the…

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