Problem 1
Equipment is purchased at a cost of $80,000. As a result, annual cash revenues are expected to increase by $45,000; annual cash expenses are expected to increase by $12,000; straight-line depreciation is used; the asset has a seven-year life; the salvage value is $10,000. Assume the company is in a 34% tax bracket.
- Determine the accounting rate of return? (round to the nearest %)
- Determine the payback period?
- Determine the NPV assuming a minimum required rate of return of 8%?
Problem 2 (Ignore taxes for this problem)
Terra Networks is planning to buy injection molding machinery costing $180,000. This machinery’s expected useful life is 5 years. They require a minimum rate of return of 8%, and have calculated the following data pertaining to the purchase and operation of this machinery:
Year | Estimated Annual
Cash Inflows |
Estimated Annual
Cash Outflows |
Depreciation |
1 | $ 40,000 | $8,000 | $28,000 |
2 | $50,000 | $18,000 | $28,000 |
3 | $75,000 | $22,000 | $28,000 |
4 | $105,000 | $35,000 | $28,000 |
5 | $110,000 | $50,000 | $28,000 |
- Determine Terra’s payback period, accounting rate of return, and NPV for this investment?
Problem 3
Company X is planning on purchasing a 3-D printer. The expected cost of this printer is $75,000, and it is expected to have a useful life of 6 years and an estimated salvage value of $3,000. The printer is expected to produce cash savings of $23,000 per year in reduced labor costs and the cash operating costs to run this printer are estimated to be $5,000 per year. Assuming Company X is in the 34% tax bracket and has a minimum desired rate of return of 12% on this investment.
Determine the:
- (a) payback period, (b) ARR, and (c) NPV (Ignoring taxes), and
- (a) payback period, (b) ARR, and (c) NPV (Assuming taxes).
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