Question : 5) Crystal Manufacturing Company provides glassware machines for major department : 1217102

 

5) Crystal Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of five years and the new equipment has a value of $231,000 with a five-year life. The expected additional cash inflows are $70,000 per year. What is the payback period on this investment?

A) 2.5 years

B) 3 years

C) 3.3 years

D) 5 years

 

6) Springtime Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $123,750 with a seven-year life. The expected additional cash inflows are $27,500 per year. What is the payback period on this investment?

A) 3 years

B) 4.5 years

C) 6 years

D) NA – project not feasible

 

7) Unlike the net present value method and the internal rate-of-return method, the payback method does NOT distinguish between the origins of the cash flows.

8) The payback method is only useful when the expected cash flows in the later years of the project are highly uncertain.

 

9) A weaknesses of the payback method is that it does not consider a project’s cash flows after the payback period.

 

10) Supply the missing data for each of the following proposals:

 

 

Proposal A

Proposal B

Proposal C

Initial investment

(a)

$62,900

$226,000

Annual net cash inflow

$60,000

(c)

(e)

Life, in years

10

6

10

Salvage value

$0

$10,000

$0

Payback period in years

(b)

(d)

5.65

Internal rate of return

12%

24%

(f)

 

 

11) Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000.

 

Required:

a.Compute the net present value at a 14% required rate of return.

b.Compute the internal rate of return.

c.Determine the payback period of the investment.

 

12) Sam’s Structures desires to buy a new crane and accessories to help move and install modular buildings. The machine sells for $75,000 and requires working capital of $10,000. Its estimated useful life is six years and it will have a salvage value of $17,560. Recovery of working capital will be $10,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $20,000.

 

Required:

a.Compute the net present value at a 12% required rate of return.

b.Compute the internal rate of return.

c.Determine the payback period of the investment.

13) Terrain Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows:

 

 

Proposal X

Proposal Y

Proposal Z

Initial investment in equipment

$180,000

$120,000

$190,000

Working capital needed

0

0

10,000

Annual cash saved by operations:

 

 

 

   Year 1

75,000

50,000

80,000

   Year 2

75,000

48,000

80,000

   Year 3

75,000

44,000

80,000

   Year 4

75,000

8,000

80,000

Salvage value end of year:

 

 

 

   Year 1

100,000

80,000

60,000

   Year 2

80,000

60,000

50,000

   Year 3

40,000

40,000

30,000

   Year 4

10,000

20,000

15,000

Working capital returned

0

0

10,000

 

Required:

Determine each proposal’s payback.