Question :
51) Network Service Center considering purchasing a new computer network : 1211980
51) Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered.
Required:
a.If the company has a required rate of return of 14%, what is the net present value of the proposed investment?
b.What is the internal rate of return?
52) EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows:
Current Machine
New Machine
Purchase Price, New
$88,000
$110,000
Current book value
33,000
Overhaul needed now
44,000
Annual cash operating costs
77,000
44,000
Current salvage value
22,000
Salvage value in five years
5,500
22,000
Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes.
53) Flilane Tire Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows:
Current Machine
New Machine
Purchase Price, New
$123,750
$162,800
Current book value
36,850
Overhaul needed now
30,250
Annual cash operating costs
69,300
52,800
Current salvage value
44,000
Salvage value in five years
8,800
38,500
Required:
Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no taxes.
54) ABC Boat Company is interested in replacing a molding machine with a new improved model. The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $20,000.
The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years. If purchased, the new machine will allow cash savings of $20,000 for each of the first three years, and $10,000 for each year of its remaining six-year life.
Required:
What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?
55) Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows:
Location A
Location B
Location C
Internal rate of return
13%
17%
20%
Net present value
$25,000
$40,000
$20,000
The owner does not understand how the location with the highest percentage return has the lowest net present value.
Required:
Explain to the owner what is (are) the probable cause(s) of the comparable differences.
