Concept explainers
Payback methods, even and uneven
Sage estimates the cost of the new equipment at $159,000. The equipment has a useful life of 9 years. Sage expects cash fixed costs of $80,000 per year to operate the new machines, as well as cash variable costs in the amount of 5% of revenues. Sage evaluates investments using a cost of capital of 10%.
- 1. Calculate the payback period and the discounted payback period for this investment, assuming Sage expects to generate $140,000 in incremental revenues every year from the new machines.
Required
- 2. Assume instead that Sage expects the following uneven stream of incremental cash revenues from installing the new washing machines:
Based on this estimated revenue stream, what are the payback and discounted payback periods for the investment?
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Chapter 21 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- 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?arrow_forwardYou are in the mail-order business and you are considering upgrading your mail ordering system to make your operations more efficient and to increase sales. The computerized ordering system will cost $80,000 to install and has maintenance costs $20,000 each year. The system is expected to last five years with no salvage value at the end of the service period. The new order system will save $60,000 in operating costs each year and bring in additional sales revenue in the amount of $40,000 per year for the next five years. If your interest rate is 15%, find the present worth of the investment. A) $184,820.25 B) $188,172.41 C) $248,737.06 D) Answers A, B and C are not correct Maintenance money for a new building at a college is being solicited from potential alumni donors. You would like to make a donation to cover all future expected maintenance costs for the building. These maintenance costs are expected to be $50,000 each year for the first 25 years, $60,000 for each of years 26…arrow_forwardWhispering Winds Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $160,000 and has an estimated useful life of eight years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $30,000. Management also believes that the new machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 11%. Click here to view the factor table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124. Round present value answer to O decimal places, e.g. 1,250.) Net present value How much would the reduction in downtime have to be worth in order for the project to be acceptable? Present value of reduction…arrow_forward
- A supermarket is planning on piloting a self-checkout system in one of its stores. It estimates that this requires an investment of about $500,000 to modify existing checkout lanes into self-checkout lanes. It also estimates that it will save $200,000 yearly in employee salaries by automating the checkout process. If the supermarket's MARR is at 10% per year compounded annually, determine the Conventional- payback period (in years) for this pilot.arrow_forwardCaine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $187,400 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $35,400. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 12%. Click here to view PV table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.) Net present value $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to 0 decimal places, e.g. 125.) $ %24arrow_forwardAn automated car wash called Jet Express outside a large Texas city on the beltway is deciding whether to build and install one dedicated vehicle wash line or have two parallel wash lines. There are no other car washes at this intersection and there will be none because all the land is developed. The second line allows for some economies of scale in total cost. The monthly fixed cost of one wash line is $13,500 per month or $162,000 per year. This includes the mortgage payment, taxes on the building, and wash equipment. The variable cost for this single line is $15 per vehicle. The fixed cost for two wash lines is $26,000 per month or $312,000 per year, and the variable cost to operate two lines is $12 per vehicle because some wash crews can work both lines. The price of the average interior and exterior car wash is $27. Use the Excel template Break-Even in MindTap to answer the following questions: What is the break-even quantity for one and two automated wash line? Round your…arrow_forward
- Blossom Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $255,800 and has ar estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $37,800. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 5%. Click here to view the factor table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to O decimal places, e.g. 125.) Net present value $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to 0 decimal places, e.g. 125.) tA $arrow_forwardCaine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $180,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $34,000. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 12%. Click here to view the factor table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.) Net present value $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to O decimal places, e.g. 125.)arrow_forwardYou work for a logistics company, which considers to invest in a computerized system to improve efficiency. The initial cost of implementation for the system is $90,000. Furthermore, it will cost $25,000 per year to maintain the system. Due to the fast nature of the business, your company can use the system for five years and there will be no salvage value at the end of the service period. Thanks to the new system, you estimate that the company will save $65,000 in operating costs each year. In addition, the increase in the effciency would bring $35,000 per year in additional revenues during the service life of the system. Given that your company's MARR is 15%, find the present worth of this investment. A) -$73,239 B) $161,412 C) $251,412 D) Answers A, B and C are not correctarrow_forward
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- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning